As legal adviser to numerous investment funds and small to medium-sized businesses, we are often asked at Harper James Solicitors that UK government schemes offer probably the most tax-effective ways to provide capital to seed, start-up, early-stage companies.
While the rules governing these schemes aren’t incredibly complicated, investors and companies are trying to find funding to be sure they understand how they work, so they don’t fall foul of the rules. Failing to offer the best legal framework may show that anticipated tax savings aren’t realized, either because the mark isn’t eligible at the outset or becomes ineligible as time passes due to structural changes.
This brief article looks at the EIS and SEIS schemes, what reliefs can be found, how to utilize them for EIS or SEIS investment, and what other considerations companies and investors need to consider when using the schemes.
What’re the EIS and SEIS schemes?
The EIS and SEIS schemes are UK government initiatives designed to stimulate investment in new companies. They supply income and Capital Gains Tax (CGT) relief to private investors if they fund start-up and early-stage companies, provided these companies are unlisted.
Eligible investments will also be exempt from inheritance tax.
One major incentive of the schemes is that the web affectation of making an EIS or SEIS investment is that funders can reduce their at-risk capital when making an eligible investment to less than 40% of the total amount invested. Click here to read the review about red rock entertainment.
Here are some recent figures showing amounts invested under the schemes, in addition to an analysis of the most popular sectors for EIS and SEIS investment:
How do these schemes benefit investors?
While investing in significant companies can offer great returns as time passes, if you support capital in small and medium-sized companies, the chance of earning more considerable gains is improved as these companies grow more quickly. The downside is that investment in these fledgling companies is In terms of potential tax savings and incentives, here is a summary of the reliefs available under the schemes:
The EIS Scheme
You obtain income tax relief of 30%. This means that you get an income tax credit in the season of one’s investment. For example, if you invest £1,000 in an EIS company, you can deduct £300 from your income tax bill in that tax year or carry this back twelve months.
You won’t pay any CGT on profits produced in an EIS company if you hold them for three years. So, if your £1,000 invested grows to £2,000 five years later, you won’t pay any CGT on the sale, giving you a saving of around £180
If on one other hand, you lose money on your investment, you can set that loss off against your income tax or against any capital gains you may have made.
There will be no inheritance tax to cover EIS shares.
The SEIS Scheme
- Income tax relief at an excellent 50%
- No capital gains to cover on profits after 36 months
- Loss relief available much like EIS
- No inheritance tax
Yet another relief called capital gains reinvestment relief, where you could achieve additional savings of 50% against CGT you’d otherwise pay on gains you’ve made if you plow that money into a SEIS company.
What legal support may you require as a small business?
If your business intends a funding round that includes EIS or SEIS investment, you will require legal support at an earlier stage in your planning. Your lawyers will allow you to, with the necessary due diligence, talk for you about your plans and review your company’s constitutional documents (its articles of association), any shareholders agreements set up, the business structure, and one other facet of the business’s affairs that may impact on eligibility.
Once you issue shares to EIS or SEIS investors, these should be paid in full and in cash when they’re given. The claims should be ordinary shares that are not redeemable and carry no preferences or other special rights to your company assets. It is possible to permit limited preferential rights to dividends. As we’ve already seen, you can’t make special arrangements with EIS or SEIS shareholders that have the web affectation of minimizing the chance inherent inside their investment, or which can be intended merely as a tax avoidance scheme.
Your association articles will need to be amended to consider the brand new shares to be issued to EIS/SEIS investors. Any existing shareholders’ agreements will even have to be amended.
What are legal services needed for investors?
For investors looking to buy shares in a business and who’d prefer to take advantage of the EIS/SEIS schemes, we would recommend contacting us to discuss your options. We would advise you to carry out the full due diligence process on the mark company before you make a firm commitment, including asking about any previous funding rounds and existing investors