Following the Autumn Budget on 30 October 2024, investors and businesses that rely on the Enterprise Investment Scheme (“EIS”) and Seed Enterprise Investment Scheme (“SEIS”) to secure essential funding to support their growth were left reassured by the news that these schemes will remain unchanged. 

Both SEIS and EIS are government initiatives aimed at stimulating investment in UK businesses by offering generous tax reliefs to attract investors. These schemes make investing in early-stage businesses much more desirable than alternative sources of financing like loans and government grants.

SEIS

The Mechanics of the SEIS 

Launched by the government on 6 April 2012, the SEIS provides tax relief to individual investors who subscribe for new shares in qualifying companies. It is primarily intended for smaller, early-stage startups.

Qualifying SEIS companies can raise up to £250,000 (with a total cap of £350,000) and offers investors significant tax advantages, including reductions in income tax and potential exemption from capital gains tax on profits generated from the investment. Any funds raised by a SEIS-qualified company must be used for activities that support the company’s growth, such as business development or, where applicable, research and development activities, provided these activities align with the company’s qualifying trade.

SEIS Criteria for Investors

To take advantage of the tax benefits offered by the SEIS, investors must meet several key criteria:

• The investor must be a UK taxpayer. 
• The investor must be an individual (and not a company).
• The investor or ‘associate’ (for e.g., family members) must not have any employment relationship with the company (please note that directors may qualify here as they are not considered to be employees for this purpose). 
• The investor must not own more than 30% of the shares in the company.
• The maximum amount an investor can invest in a single tax year is £200,000. (It’s also important to note that companies can raise a total of up to £250,000 through SEIS over their lifetime.)
• The shares must be paid for at the time of the investment (i.e. not in instalments) 
• Shares purchased must be ordinary shares that carry full risk, are non-redeemable, and do not offer any special or preferential rights.
• The investment must be made in cash.
• The shares must be held for a minimum of three years.
• The investor must not receive any financial return or “value” from the SEIS company for at least three years following the investment.

SEIS Criteria for Companies

In addition to meeting investor requirements, companies must also fulfil several conditions to qualify for the SEIS:

• The company must carry on a ‘new’ qualifying trade. According to HMRC, most trades will qualify, including any research and development which will lead to a qualifying trade. However, a company may fail to qualify if more than 20% of its activities involve industries such as:
• coal or steel production
• farming or market gardening
• leasing activities
• legal or financial services
• property development
• running a hotel
• running a nursing home
• generation of energy, such as electricity and heat
• production of gas or other fuel
• exporting electricity
• banking, insurance, debt or financing services
• The company must be established in the UK (please note that companies based outside the UK can still qualify for SEIS if they do maintain a permanent establishment within the UK). 
• The company must not have been trading for more than three years at the time of the investment.
• The company cannot be listed on a recognized stock exchange when the shares are issued.
• The company must have no plans to become a listed company or a subsidiary of one at the time of the share issue.
• The company should not control any other company, unless the subsidiary is a qualified SEIS company.
• The company must not have been controlled by another company since its incorporation.

Additionally, the company and its subsidiaries must ensure they meet the following requirements:

• The “gross assets” of the company must not exceed £350,000 at the time the shares are issued.
• The company must not be part of a partnership.
• The company must have fewer than 25 full-time equivalent employees when the shares are issued.

If the company meets these conditions and is deemed SEIS-compliant, the SEIS scheme is available for the benefit of both the company and its investors.

EIS

The Mechanics of the EIS

Once the entire SEIS funding cap has been met, companies will usually then turn to the EIS as a means for facilitating the growth of the company.

Introduced in 1994, in the same vein as the SEIS, EIS is a scheme designed to encourage investment in early-stage businesses (but businesses far larger in size than those qualifying for SEIS) by offering significant tax reliefs to individual investors who acquire new shares in qualifying companies under seven years of age.

Eligible EIS companies can raise up to £5 million yearly as part of the scheme, with the Government imposing a lifetime cap of £12 million per company. Any funds raised by a EIS-qualified company must be used for activities that support the company’s growth, such as business development or, where applicable, research and development activities, provided these activities align with the company’s qualifying trade.

EIS Criteria for Investors 

As with the SEIS, there are specific requirements an investor must meet to qualify for the EIS tax benefits:

• The investor must be a UK taxpayer. 
• The investor must purchase new ordinary shares that carry no preferential rights. If the investor already holds shares in the company, these must either be subscriber shares or, if acquired later, they must be EIS-eligible shares for which tax relief has been claimed.
• The investor, or any “associate” (e.g. family members or close business partners), must not be connected to the company during the period starting two years before and ending three years after the share issuance. When an investor or their associate is “connected” to a company, it generally means that there is a relationship that could potentially influence the investor’s decision-making or create a conflict of interest, which could undermine the independence of the investment. 

EIS Criteria for Companies

Some of the main criteria to be a qualifying EIS company are as follows:

• The company must have a permanent establishment in the UK.  
• The company must carry out a qualifying trade (as outlined above for SEIS).
• The company must have been trading for less than 7 years, and EIS investment can only be received within 7 years of its first commercial sale.
• The company must have fewer than 250 full-time employees at the time of the share issue (or less than 500 employees if it is a “knowledge-intensive” company).
• The company must have gross assets of no more than £15 million, and no more than £16 million immediately after the issuance of EIS shares.
• The company must not be listed on a recognized stock exchange at the time the shares are issued, nor should it have plans to list in the near future.
• The company must not control another business, except for qualifying subsidiaries.
• The company must not be under the control of another company, and no more than 50% of its shares should be owned by another entity.
• The company should not be established with the expectation of winding up after completing a particular project or series of projects.
• The shares must be paid for at the time of the investment (i.e. not in instalments). 
• Shares purchased must be ordinary shares that carry full risk, are non-redeemable, and do not offer any special or preferential rights.
• The investment must be made in cash.
• The shares must be held for a minimum of three years. 

EIS/SEIS Income Tax relief 

When acquiring new shares, investors can claim Income Tax relief either in the tax year in which they make the investment, or in the preceding tax year, provided they opt to treat all or part of the investment as being made in the prior year. The investor is entitled to the following reliefs:

Scheme	Maximum Annual Investment Eligible for Relief	Percentage of Investment Eligible for Relief
EIS	£1 million (or £2 million if at least £1 million of that is invested in knowledge-intensive companies)	30%
SEIS	£200,000	50%

Investors can only claim tax relief up to the amount of Income Tax they have paid in the UK. Any unused relief cannot be carried forward to future tax years.

EIS/SEIS CGT relief 

Investors who participate in the EIS or SEIS may be eligible for various Capital Gains Tax (“CGT”) reliefs or deferrals when they dispose of their shares as follows:

Scheme	CGT Relief on Initial Investment	Type of CGT relief for Initial Investment	CGT Exemption on Sale of Shares	Relief for Capital Losses Against Income
EIS	100% relief on the amount invested	Deferral of CGT liability	Exempt from CGT on gains, if Income Tax Relief has been claimed	Yes, losses can be offset against income
SEIS	50% relief on the amount invested	CGT Exemption	Exempt from CGT on gains, if Income Tax Relief has been claimed	Yes, losses can be offset against income

Deferral relief (EIS) 

The EIS deferral relief provides investors with the opportunity to delay the payment of an existing Capital Gains Tax (“CGT”) liability, provided that the gain is reinvested into qualifying EIS shares.

• To be eligible for this deferral relief, the investor must invest in EIS shares within one calendar year before or three calendar years after the sale of the asset from which the gain was realised.
• However, the CGT liability will become due in the following situations:

• • When the investor disposes of the EIS shares.
  • If the investment is cancelled, redeemed, or repaid.
  • If the company no longer meets the requirements of the scheme.
  • If the investor becomes a non-resident in the UK.

CGT exemption (SEIS)

If you invest in a company through the SEIS, you will be exempt from paying CGT on any profits made from the sale of your shares, provided you meet the following conditions:

1. You must have received Income Tax relief on your investment, and this relief must not have been reduced or revoked at any point.
2. You must hold the shares for the minimum holding period required by the scheme, which is at least 3 years.

Loss relief (EIS) 

If you sell your EIS shares at a loss, eligible investors have the option to offset the loss (after deducting any Income Tax relief previously claimed) against their income. This can be applied to the tax year in which the shares were sold or to the previous tax year.

Contact us

Moorcrofts expects EIS and SEIS to remain popular and viable options for investors to gain valuable income tax savings on their investments and for companies to attract investment. 

For assistance, please get in touch with our corporate team and we would be happy to help.