How to attract investors with government tax relief schemes
Do you have a Company that is less than 7 years old and is looking for investors? Did you know that you can attract investors with government tax relief (SEIS and EIS)?
Attracting new investors to put their hard-earned cash into your new start up company can be hard.
There are, however, government tax relief schemes available which enable investors who are UK taxpayers to reclaim a large proportion of the funds they invest by way of tax relief. These are known as ‘SEIS’ (Seed Enterprise Investment Scheme) and ‘EIS’ (Enterprise Investment Scheme).
In addition, provided investors hold the shares for at least 3 years, when they come to sell them, they do not have to pay capital gains tax on them.
It is important to note, however, that some close family members may not qualify for the reliefs even if they are UK taxpayers and likewise some directors and employees may not qualify.
The Rules
In order to qualify the company must meet certain criteria, including:
- The company must be based in the UK;
- It must be carrying out a ‘qualifying trade’;
- It must be a private limited company;
- It does not have any subsidiaries (unless they are ‘qualifying subsidiaries’);
- It is not controlled by another company or have another company own 50% or more of its shares;
- It only has one class of ordinary shares and cannot be redeemable or carry any special rights;
- It does not plan to close down after the completion of the project for which it is obtaining funding ends;
- The money raised cannot be used to buy another business;
- The money raised must be used to grow and develop your business;
- The money raised must meet the ‘risk to capital’ test i.e. the investment must pose a real risk of the investor losing the money and no plan can be put in place to protect the investment.
Specific criteria for SEIS:
| Tax Relief | 50% |
| Lifetime Limit | £250,000 (including any earlier investment where other state aid has been claimed) |
| Number of Employees | Less than 25 (full time equivalent employees) |
| Gross Assets | Not exceeding £350,000 |
| Time Limits for spending money raised | 3 years |
Specific criteria for EIS:
| Tax Relief | 30% |
| Annual Limit | £5m* |
| Lifetime Limit | £12m* (including any earlier investment where SEIS/other state aid has been claimed) |
| Number of Employees | Less than 250 (full time equivalent) |
| Gross Assets | Not more than £15m before the investment or £16m immediately after the investment |
| Time Limits for spending money raised | 2 years |
*Limits are extended for knowledge intensive R&D companies.
The Process
Before you start the investment process, you can apply online for ‘Advance Assurance’ to ascertain whether your company qualifies for either of these schemes. You will need to submit all of your supporting documents for HMRC to decide whether it thinks it likely that your investment will qualify or not. This will give your prospective investors a good degree of comfort that either SEIS or EIS will apply to their investment. However, there is no 100% certainty until the new shares have been issued and the company is then able to apply online for its ‘Compliance Statement’.
Once HMRC has reviewed the company’s Compliance Statement and is satisfied that the investment is compliant with the relevant scheme rules, it will issue certificates to the company for each investor. The company then sends a certificate of compliance out to each qualifying investor, who will then submit them to HMRC with their next tax return in order to claim their reliefs.
Example of Tax Reliefs
If an investor has paid £10,000 for their shares, under the SEIS scheme they will be entitled to a £5,000 deduction from their next tax bill and under the EIS scheme they will be entitled to £3,000 deduction.
What if the company fails?
In the event that the company subsequently fails, the investor can offset the part of the original investment which they have not reclaimed through tax relief under either the SEIS or EIS schemes (so in our £10,000 investment example, the amount would be £5,000 under the SEIS scheme or £7,000 under the EIS scheme) by claiming Loss Relief against either income tax in the current or previous year or against any subsequent capital gains tax.
One final thing to bear in mind if you are a company talking to potential investors or if you are a potential investor: whilst the rules say that shares only need to be kept for a period of three years before they can be sold without the investor having to pay capital gains tax, there is no liquid market in the shares of a private limited company, so whilst investors may wish to sell their shares to liquidate their investment after three years, they many not find a willing buyer at that point.
If you wish to find out more about SEIS or EIS or discuss the taking in of investment generally, please contact Penny Paddle via the details below.
