SEIS and EIS Basics: Tax Reliefs That Help Startups Raise Money

By John Thomas, Senior Accountant

For early-stage UK companies, the Seed Enterprise Investment Scheme and the Enterprise Investment Scheme are the two most powerful fundraising tools available. They offer investors generous income tax relief, capital gains exemptions and loss relief, which makes investing in a risky startup significantly less risky after tax. If you are raising money, understanding these schemes is not optional. Here is how they work.

What the schemes are

SEIS is aimed at very early-stage companies raising their first external investment. EIS is for slightly more established young companies raising larger rounds. Both work the same way in principle: qualifying investors who buy new shares in a qualifying company get income tax relief on the amount invested, pay no capital gains tax on the eventual disposal if conditions are met, and can claim loss relief if the investment fails.

The reliefs apply to the investor, not the company, but the company must qualify and must administer the scheme correctly for investors to claim. In practice, SEIS and EIS status is a key part of the pitch: many angel investors will not invest without it.

SEIS: the headline numbers

From April 2023, the SEIS limits were significantly increased. A company can now raise up to 250,000 pounds under SEIS, must have gross assets of no more than 350,000 pounds before the investment, must be less than three years old from first commercial sale, and must have fewer than 25 employees.

For investors, SEIS offers 50% income tax relief on investments up to 200,000 pounds per tax year. Invest 100,000 pounds and the income tax bill falls by 50,000 pounds. Gains on SEIS shares are exempt from capital gains tax after three years, and there is a capital gains reinvestment relief: gains reinvested into SEIS can themselves be exempted up to 100,000 pounds per year. If the company fails, loss relief is available on the net amount at risk.

EIS: the headline numbers

EIS applies to larger raises: up to 5 million pounds per year per company, or 10 million for knowledge-intensive companies, with a 12 million pound lifetime limit (20 million for knowledge-intensive). The company must be less than seven years from first commercial sale, or ten for knowledge-intensive companies, with up to 250 employees.

Investors get 30% income tax relief on up to 1 million pounds per year, or 2 million for knowledge-intensive companies. Gains are CGT-exempt after three years, losses qualify for loss relief, and capital gains can be deferred by reinvesting into EIS. The reliefs are less generous than SEIS percentage-wise, but they apply to much larger investments.

Advance assurance: get it before you pitch

Before raising, companies can apply to HMRC for advance assurance that they qualify. It is not legally required, but investors expect it, and pitching without it raises questions. The application sets out the company's structure, trade, and how the money will be used. HMRC typically responds within a few weeks, though complex cases take longer.

After the investment, the company issues EIS1 or SEIS1 compliance statements and provides investors with EIS3 or SEIS3 certificates, which the investors use to claim relief on their tax returns. The admin matters: no certificates, no relief.

Qualifying conditions to watch

The company's trade must be a qualifying trade. Most commercial trades qualify, but excluded activities include dealing in land, banking, insurance, legal and accountancy services, and receiving royalties in certain circumstances. Property development and pure investment businesses do not qualify.

The money must be used for the qualifying business activity within two years, and the shares must be new ordinary shares with no preferential rights that would breach the rules. Investor independence matters too: investors connected to the company, generally through more than 30% ownership or employment, are excluded, with some SEIS flexibility for directors.

Common pitfalls

Raising before qualifying. Taking investment before advance assurance, or before the company meets the age and size tests, can disqualify the round.

Using the money wrongly. Funds must go into the qualifying trade. Parking SEIS money in a way that does not meet the risk-to-capital condition causes problems.

Forgetting the certificates. Companies complete the raise and never issue the compliance certificates. Investors cannot claim relief without them, and angry investors do not reinvest.

Breaching the rules later. Certain events within three years, such as the company being taken over in a non-qualifying way or value being extracted to investors, can claw back relief.

Plan the raise properly

SEIS and EIS transform the economics of early-stage investment, but they reward preparation and punish improvisation. Get advance assurance early, structure the round correctly, and handle the compliance certificates promptly.

If you are planning a fundraise, get the tax structure reviewed before you take money. Finex Outsourcing advises UK startups on SEIS and EIS qualification and compliance, and their corporation tax and self-assessment services cover the full tax position of growing companies.


 

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