4. Angel Investing: EIS & SEIS
In this article, investor Jodie O’Keeffe takes a deep dive into the Enterprise Investment Scheme tax breaks.
We know angel investing is high risk, high reward, but there’s (tax) relief in sight.
1. What is EIS?
The Enterprise Investment Scheme (EIS) encourages investment in small businesses by providing tax breaks on share purchases. In simple terms it means 30% income tax relief on your investment and no capital gains tax on profits from that investment; you can offset any loss against your income tax and incur no inheritance tax on those shares. For example, if you invest £10,000 in an eligible business, you can take £3,000 off your tax bill that year. If you sell your shares (after three years or more) for a profit, you don’t pay capital gains tax on the profit. If you lose your investment of £10,000, and have already claimed the £3,000 tax relief, you can reduce your taxable income by £7,000 that year. This is a general example, so check with your tax advisor about how the scheme works best for you.
2. What is SEIS?
The Seed Enterprise Investment Scheme (SEIS) is for younger businesses and is similar to EIS but offers 50% tax relief, and the added bonus of capital gains reinvestment relief, where you can reclaim up to 50% of capital gains tax paid on other investments, if you reinvest into SEIS qualifying businesses. SEIS businesses are very early stage, and must be less than 3 years old, with fewer than 50 employees and under £200,000 in gross assets.
3. What does that mean for investors?
Basically, you are limiting your potential losses and paying less tax on your potential gains, making your angel investments more attractive whether they win or lose. It’s a way of encouraging innovation and investment and means a better deal flow with better funded early stage businesses, and more chance of a business surviving the tough early years through to later stages of investment and growth.
4. How does it work in practice?
When looking at a business to invest in, ask the founder if it is EIS or SEIS eligible, and ask to see an advance assurance letter from HMRC. This letter gives investors some certainty that their investment will qualify for tax breaks. Not every investment will be EIS or SEIS eligible, but it’s best to establish this up front as it may impact your investment rationale. EIS or SEIS eligibility is usually an important selling point and the founder will mention it in the pitch deck, with the assurance letter offered in the data room. After you invest, the business will issue you with an EIS3 or SEIS3 compliance certificate detailing your investment, which you can then use to claim relief. Check the certificate lists the correct details and have errors remedied as soon as possible, to avoid having your claim rejected at tax time.
5. What should I look out for?
There are limits to the eligibility of EIS and SEIS qualifying businesses — amount raised per year, amount raised in the lifetime of the business, the number of years the business has been operating. If a business you are interested in is eligible, check how close it is to these limits. It might be that the investment round closes after the eligibility expires, something you need to be aware of. EIS businesses can raise up to £5m in any one year and £12m over the lifetime of the business, and this only qualifies within 7 years of the company’s first commercial sale. The business can be registered in another country but must also have a UK office. SEIS businesses can raise a maximum of £250,000, and often move on to become an EIS eligible business once the SEIS eligibility expires. And ask your accountant or tax advisor for advice specific to your needs.