Tax relief investment schemes in the UK
What are tax reliefs in investments?
Investment tax reliefs are benefits provided by governments to encourage individuals and businesses to invest in certain types of assets or activities. These tax reliefs can come in different forms, such as tax deductions, tax credits, or tax exemptions.
In the UK, there are two venture capital schemes which offer tax relief to individuals to encourage them to invest in small, high risk companies, EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme). SITR (Social Investment Tax Relief) previously allowed investors to get tax relief when purchasing shares or loaning money to qualified Social Enterprises, though as of April 6th 2023, SITR is unavailable to new investments.
The Connectd network has hundreds of startups who have advanced assurance for SEIS and EIS relief and investors can capitalise on huge tax relief benefits when investing into these companies. Become a member of our investor community to connect with the huge range of companies who qualify for tax relief on investments.
EIS & SEIS Investment Schemes
The EIS and SEIS schemes both offer a range of tax reliefs to those who invest into qualifying companies but there are some key differences to note.
One of the key differences between SEIS and EIS is that SEIS is explicitly targeted at startups and early-stage businesses, whereas EIS can be used by more established businesses. SEIS has lower limits than SEIS on qualifying criteria, including number of employees, value of assets and trading period. SEIS was launched to allow companies to increase their chances of a successful first raise, while EIS helps companies who may be in later stages of funding and growth, are lower risk and need higher levels of investment.
For investors, there are some important numbers to crunch. The percentage of tax relief received on investment into SEIS and EIS qualified companies is 50% and 30% respectively, while investors can invest up to £200,000 (into various qualifying businesses) through SEIS per year, while the annual EIS limit stands at £1 million.
There are a number of other differences, including the various reliefs and benefits offered to investors by the schemes which we will look at in more detail below.
Seed Enterprise Investment Scheme Explained
SEIS is designed to help small, very early-stage businesses attract investment. As these types of business are perceived as higher risk, the tax relief is a very generous 50% of the value of the investment. The 2023 UK Spring budget saw major changes to the SEIS scheme, making it an even more attractive proposition for investors and increasing the amount of investment qualifying companies could obtain via SEIS.
Key features:
- Must have fewer than 25 employees
- Gross assets less than £300,000 (increased from £200,000 in April 2023)
- Companies can only raise £250,000 through SEIS in their lifetime
- Ineligible if previous investment has been received through EIS or a VCT (Venture Capital Trust)
- Trading for under three years and must not have previously carried out a different trade
- Fall under the list of qualifying trades (you can find out which trades are ineligible here)
- Investors can invest a maximum of £200,000 through SEIS per annum (up from £100,000)
Advantages & benefits for investors:
- 50% income tax relief on all investments through SEIS (for every pound invested you get 50p back)
- Annual maximum that can be invested through SEIS increased to £250,000 (prior to April 2023 this was £150,000)
- No Capital Gains Tax (CGT) to pay on any gains through SEIS after three years from the time of investment
- CGT Reinvestment Relief - if you dispose of a chargeable asset (such as a second home) which would ordinarily be subject to CGT up to 50% of the gain could be tax exempt if some or all is reinvested through SEIS
- SEIS investments are inheritance tax exempt
The list of potential benefits beyond the primary boon of income tax relief can be very beneficial to those who invest through SEIS despite the relatively low limits for both qualifying companies and investors.
Enterprise Investment Scheme Explained
While, unlike SEIS, there were no changes made to the qualifying criteria or limits for EIS in the 2023 Spring Budget, the EIS “sunset clause” (end date) was extended from its previous cut off of April 2025. In 2017, the UK government decided to provide preferential terms through the EIS scheme for ‘Knowledge Intensive Companies’ (KICs) which allows investors to invest double the amount into these businesses, compared to the standard EIS investment ceiling.
Key features:
- Must have fewer than 250 employees (500 for KICs)
- Gross assets less than £15 million
- Total lifetime investment through EIS, SEIS and VCTs is £12 million (£20 million for KICs)
- Trading for under seven years (10 years for KICs)
- Must not be trading on a recognised stock exchange (i.e. the company is unquoted).The exception to this is that they can be listed on AIM, which is treated as unquoted for the purposes of EIS.
- Investors can invest a maximum of £1 million through EIS (£2 million for KICs)
Advantages & benefits for investors:
- 30% income tax relief on all investments through SEIS (for every pound invested you get 30p back)
- No Capital Gains Tax (CGT) to pay on any gains through EIS after three years from the time of investment..
- CGT deferral - defer gains of any size, made up to three years before and one year after the EIS investment.
- EIS investments are inheritance tax exempt
- KICs offer larger investment opportunities through EIS and the chance to invest into innovative, dynamic businesses
Investor Eligibility criteria for Seed Enterprise Investment Scheme
In order to take advantage of the benefits of investing through SEIS, investors must satisfy the following criteria:
- Be liable to pay UK income tax (though being resident in the UK is not required)
- Hold the shares for at least three years
- Invest a maximum of £200,000
- Not be an employee of the company invested in, though paid directors can invest through SEIS. Associates (spouses, children, parents etc) of investors cannot be employees of the company either.
- Not have a substantial interest in the company (i.e. possess or be entitled to possess more than a 30% stake in the company)
- No loans should be made to you or your associates which are linked to the company you're investing in.
- No related or reciprocal investment arrangement (e.g. two individual agreeing to invest in each other’s company, or companies in which they have a substantial interest)
- Must pay in cash for shares upfront and in full
- No tax avoidance. There must be a genuine risk of loss of capital and the company must use the money to grow the business. As with reciprocal investment, you must not enter into an agreement with a company and its associates to use the investment to avoid paying tax.
Investor Eligibility criteria for Enterprise Investment Scheme
Eligibility criteria for EIS are very similar to those for SEIS, though there are a couple of subtle differences.
- Be liable to pay UK income tax (though being resident in the UK is not required)
- Hold the shares for at least three years
- Invest a maximum of £1 million
- Cannot be an employee of the company invested in, and nor can associates (spouses, children, parents etc).Unlike SEIS, paid directors cannot invest through EIS, but unpaid directors can
- Not have a substantial interest in the company (i.e possess or be entitled to possess more than a 30% stake in the company)
- No loans should be made to you or your associates which are linked to the company you're investing in.
- No related or reciprocal investment arrangement (e.g. two individual agreeing to invest in each others companies, or companies in which they have a substantial interest)
- Must pay in cash for shares upfront and in full
- No tax avoidance. There must be a genuine risk of loss of capital and the company must use the money to grow the business. As with reciprocal investment, you must not work with a company and its associates to use the investment to avoid paying tax.
Benefits of Investment Tax Relief
Investment tax relief provides an attractive and cost-effective way of investing, allowing investors to diminish their exposure and potential losses when investing into higher risk companies. Investing into early-stage companies can be a lucrative activity, with share values rising sharply once companies have achieved growth and become more established. SEIS and EIS offer the chance to support innovative and pioneering businesses, and recent government policy reinforces that these types of businesses, and those who invest in them, will receive the support they need to grow. Many investors are attracted by the knowledge that they can help these innovative companies to create jobs and drive economic growth.
There are hundreds of dynamic businesses in the Connectd network and through our innovative smart match technology, investors can find the SEIS and EIS qualified businesses that best suit their investment criteria.
Potential Risks of Investment Tax Relief
- All investments carry the risk of losing value, and investments made through tax relief schemes are no different.
- SEIS and EIS qualified companies are, by definition, higher risk as they are young businesses. The failure rate for businesses under three years old is sometimes quoted as being as high as seven in every ten. However, this relatively high risk is reflected in the generosity of the tax-relief incentives. As an investor, due diligence is an absolute must in order to give yourself the best chance of backing a company which will succeed.
- Tax relief is not guaranteed; tax reliefs and tax allowances are based on current legislation, and HMRC’s interpretation could change in the future.
- There’s no guarantee that the companies invested in will maintain their SEIS or EIS-qualifying status. If a company loses its status within three years of investment, you may be asked to repay income tax relief claimed.
- While the minimum time investors are required to hold shares is three years, it may be necessary to hold on to shares much longer than this to see a return on investment. Early-stage businesses can take many years to break even, let alone make a profit, so patience may be needed.
Disclaimer: Connectd does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should seek professional advice directly for any matters relating to your business or before taking action in relation to any of the content provided.
