SEIS (seed enterprise investment scheme) and EIS (enterprise investment scheme) are tax incentives for those investors who are willing to take a risk on smaller/riskier trading companies.
These tax breaks are to try and plug the gap for smaller enterprises.
SEIS means an early stage company can raise up to £150,000. EIS is available to larger/more advanced companies and can follow and SEIS investment.
There are detailed qualifying criteria. The tax breaks are very good particularly for the seed stage investments but they HAVE to be in exchange for equity.
Deductions from income tax equal to 50% deduction from their income tax bill. They have to be for shares. Annual investment limit is £100,000. For EIS it is up to a million at 30%.
If the shares have been held for over 3 years then capital gains tax does not apply. If they make a loss that loss can be used to set against the income tax bill.
SEIS: The only capital at risk from £100,000 is actually £17,500
Under EIS: £38,500 from the same size of investment.
They have to be invested in new businesses. SEIS is capped at £150,000 total or £100,000 a year. For EIS the cap is £1 million per investor up to £5 million a year. Total cap is £13 million. Excluded activities include: property development, care homes, hotels, and any company that does not own (home grown) the greater part of the value of the IP. Patents/Trademarks/Software all need to be in the company from an early stage in order to protect against this.
It is hard for founders to get these tax breaks in their own companies. This is because if they own more than 30% of the company they can’t be considered. The founder therefore would have to accept going down to a 30% shareholding which is anathema to most founders.
EMI (Equity management incentive) options. These are share options only open to employees of the company. There are maximum limits. The company has be independent; Growth assets of no more than £30 million and less than 250 employees on a less than full time equivalent basis; You also have to have a qualifying trade and the business has to have a qualifying establishment (country).
You need a written agreement, HMRC registration, employee declaration, notification of option grant within 92 days, valuation.
EMI is popular because it has some significant tax advantages – you pay no income tax on the grant.
Automatic entrepreneurs relief gets you 10% tax relief if there is >1 year between the sale and acquisition of the shares.
Restricted shares and growth shares are other options. ESS is another option (Employee shareholder status). These shares are given in exchange for giving up certain statutory employment rights. They are tax free up to £50k on acquisition. However, you do pay income tax on up to £2k.
When the value of the shares is low (ie. seed stage) these kinds of shares can be very valuable.
However, EMI is the most tax efficient if you qualify for it. In the other contexts one has to balance up the risks and benefits of various different options.