(S)EIS Investment Schemes Explained

Video Transcription

In this session we’re going to look at growth investment schemes for your business and particularly take a closer look at the SEIS or Seed Enterprise Investment Scheme and the EIS or Enterprise Investment Scheme.

We’re going to have a closer look at both of those schemes from both a business perspective and from an investor perspective.

Why are Investment Schemes important?

If you’re running a business and you’re looking to get some capital together to grow it, these schemes are absolutely essential to consider as part of your overall plan for getting funding for your business.

Certainly, in the UK, these schemes are highly popular with small and medium-sized businesses, and they really do provide significant benefits to your investors.

And indeed, some investors wouldn’t invest without some of these schemes in place. So, let’s take a closer look at the schemes. You can consider the Seed Enterprise Investment Scheme as a sort of baby brother to the Enterprise Investment Scheme.

Seed Investment Scheme

So, from a business perspective, UK businesses can qualify for the SCIS Scheme. And that business has to have assets of less than 200,000 to qualify. It also requires less than 25 people to be employed at the business to qualify. So designed for those slightly smaller businesses.

The business has to have been trading for less than two years to qualify, and some people get confused about the term trading. That doesn’t mean when you open your company or when you incorporate your company. That means the date from which you open the doors of your business to get you so often. It’s the first revenue date, often different from the day you incorporated the business.

So, top tip: don’t forget those two are different. This is from your trading date. You have to be trading for less than two years.

Maximum You Can Raise

And from a business perspective you can raise up to a hundred and fifty thousand pounds on the seed scheme in its entirety. So, that could be multiple raises, but you can raise to a maximum of a hundred and fifty thousand pounds.

It’s worth noting that both of these schemes are quite complicated, and many rules sit behind them. And what we’re doing today is a kind of, I guess, a good summary, but always check with your advisor on the specifics of your business. So, a UK business trading for less than two years raised 150,000.

The Scheme for Investors

Let’s look at what your investor, might get or requirements for being an investor. They need to hold those shares for three years in your business. That’s to encourage medium-term shareholding rather than short-term shareholding, so they need to hold the shares for three years in order to receive the benefits.

They can hold a maximum of 30% in the business, so they can’t have a total shareholding of more than 30% of the shares in the business, and those shares need to be what’s called full-risk shares and ordinary shares. So, the same shares that you, perhaps as an owner, would own or anybody else in the business.

There can’t be another type of share which perhaps gives them some insulation from the risk of investing in a business. So they’ve just got to be normal full-risk ordinary shares. An investor can invest a maximum of 100,000 in SEIS schemes per year.

Yearly Maximum Investments

So, every year, an individual could invest up to 100, 000 in SCIS-qualifying investments. If they do that, then some of the benefits are that they will get 50% of their investment back as a tax credit for investing in your business.

What investors get

So if an investor invests 20,000 in your business in exchange for full-risk ordinary shares, they can claim a 10,000 deduction on their tax return.

So they’ll get 10,000 of the tax they would pay back for investing 20,000 in your business.

So in the business, you would have got £20,000, but it would have cost the investor £10,000. Key metric there.

So you can see why investors are adamant that if they’re going to invest their money if these schemes are appropriate, make sure that they’re applied because it’s such a large incentive.

Free of Capital Gains

Not only that, not only do they get 50% back, but when they sell their shares, which they’ve held for at least 3 years, the capital gains tax that you would pay, i. e. the difference between what you bought the shares at and what you sold the shares at, if there is any gain, and they’ve done well out of it, it’s CGT free.

So they’re going to pay zero in terms of capital gains tax.

So if they invested their 20,000 in this example, let’s say they tripled their money and sold the shares for 60,000. The gain of 40,000, they’d pay no tax on that gain whatsoever.

So, to get 60,000 they will have invested net 10,000 in the business, 50% back. A pretty good outcome. Now they’re investing in a high risk business because it’s young, it is, hasn’t been trading for all that long. That’s fair, but what a great incentive to the risk investment in those smaller fledgling and we love the SCI scheme for helping smaller businesses that are at an early stage attract investment from individuals.

Businesses that Qualify for EIS

So once you’ve got your head around the SEAD scheme, it’s quite easy then to think about the EIS scheme as a more grown up version for slightly more mature businesses. And let’s look at the businesses that qualify for EIS. So again, similar to the SEIS scheme, you need to be a UK Business and you are allowed to have assets and people, but the amounts of assets and people that you’re allowed are obviously much higher than in the SCIS scheme.

Those numbers come in at assets must be under 15 million and people under 200 and 50 people in the business. There are so many higher thresholds there, which means a lot more businesses will qualify for this.

In terms of trading, you don’t need to have been trading for less than two years, but if you do want to raise EIS investment, for your first investment, it really needs to come in the first seven years of business. If you do that, you can continue to raise afterwards, but either first investment under EOS needs to be within the first seven years of trading.

Maximum Amounts

So again, as we said, it is important to understand your first trading date, and businesses can raise up to five million pounds per annum in total for EIS qualifying investments, and they can raise a total of 12 million over the lifetime.

So 5 million a year or 12 million in total for EIS. So quite a significant jump in amounts you can raise in your business for EIS qualifying investments. Let’s look at the investor side.

EIS Investor Requirements

So again, similarities with the SCIS scheme. We need to hold the shares for three years. We can have a maximum of 30% of the shares in the business. So, there are two similar rules there.

Again, we need to have full risk, ordinary shares in the business and the investor, rather than being limited to this 100,000 for SCIS can invest a whopping million pounds a year in EIS schemes. So if you’re lucky enough to have a million pounds able to invest, you can do that every year should you wish.

Now, because these are bigger businesses and in theory less risky, the incentives are not quite as big as they are in SEIS.

What Investors Get

So you get, as an investor, 30% back, so if you take 100,000, of investment, you’re going to be able to claim back a 30,000 tax rebate on that investment. So not as good as the 50 percent in the SCIS scheme, but still a very good way of mitigating your risk in a business that is vulnerable, bigger and still looking to grow and develop.

Capital Gains Free

Similar to SCIS, if you hold those shares for three years, so if your a hundred thousand pound investment was to triple in value to 300,000 pounds, then that would be a 200,000 pound gain for your investor, and that would be capital gains tax-free.

Investments summary

So, if there is success in the business in SEIS and EIS, you can see that it is hugely attractive for your investors to have that scheme for their money. They’re not only going to de-risk their investment but they’re going to be taxed much less heavily on the way out.

So, if you’re watching this and you’re a business owner and you’re thinking about raising investment, then think about whether or not you’d be able to persuade your investors to invest without these schemes.

I think you’ll struggle, and so if you are a business that is a qualifying business and you qualify under these criteria, then do think about putting these in place to help your growth and to garner investment in your business. We’ll see you next time.