The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) both offer investors tax advantages when they invest in early-stage businesses. However, there are several contrasts, from the income tax relief available to the maximum annual investment.
Both initiatives are government-backed, designed to encourage private capital investment into companies with great growth potential, but at the start of their life cycle – to qualify, a business must have been trading for no more than three years for SEIS eligibility and seven for EIS.
Today we break down all the comparisons to explain how these investment opportunities differ to help investors make informed decisions about the right options for their portfolios.
Company Qualification Requirements for EIS and SEIS
Eligibility rules apply to both schemes, dictating the criteria a company needs to demonstrate to be awarded ‘advance approval’. This status means that HMRC has provisionally reviewed the company funding raise plans and verified that investments made will be compliant – this can potentially change if the company becomes ineligible in the meantime.
Note that both schemes require companies to be UK based and carry out a qualifying trade. Some businesses, such as those involved in property development, banking or steel production, cannot apply for venture capital schemes if these excluded trades form 20% or more of their activities.
Companies cannot be listed on any stock exchange or be in the process of becoming a listed entity.
EIS Requirements
Companies hoping to raise capital investment with EIS status need to meet the following criteria. Knowledge Intensive Companies (KICs) refer to companies that are engaged in innovative research and development with higher thresholds available.
- A trading history of at most seven years or ten years for KICs.
- Up to 250 employees, or 500 for a KIC.
- Maximum assets of £15 million, raising up to £12 million total in investment or £20 million if the business is a KIC. Annual investment raises are capped at £5 million per year.
- Funds raised must be invested into the company within two years.
SEIS Requirements
Some of the rules relating to SEIS investments changed in April 2023, with increases to the maximum a company can raise, the maximum an investor can invest, and the maximum age of the company.
- Trading history of a maximum of three years.
- Up to 25 employees and maximum assets of £200,000.
- The maximum investment raised is £250,000, which must be spent in three years.
These differences exist because the SEIS is specifically targeted towards start-ups or businesses within their first three years of trading, with tighter asset and workforce caps. EIS companies are still early-stage businesses, but larger organisations with a longer trading history are eligible.
Tax Reliefs and Investment Caps on EIS vs SEIS Investments
Just as the eligibility rules for companies differ between the EIS and SEIS, the tax advantages and reliefs available to investors are also different. One of the biggest incentives for investors is the income tax relief available, offsetting tax liabilities in the year of investment or carried back to the year before.
EIS investment opportunities offer 30% income tax relief, based on a maximum investment, per investor, of £1 million per year. The highest possible tax relief claimable per annum is, therefore, £300,000.
The SEIS has a higher income tax relief available of 50% but a maximum annual investment, per investor, of £200,000 – making the tax relief available up to £100,000.
Corporations cannot invest in SEIS companies but are permitted to invest in EIS shares or funds. However, corporate investors are not entitled to any tax relief. Both investment schemes provide loss relief and Capital Gains Tax relief or deferral.
Related reading: What are the best tax-efficient investments in the UK?
Choosing Between EIS and SEIS Investment
The right investment option will depend on your objectives and circumstances, such as:
- The amount of capital you wish to invest.
- Your income tax liabilities and the level of tax reliefs you’d like to prioritise to reduce or remove this obligation.
- Your risk profile and your attitude to higher-risk early-stage investments.
- Preferences around the types of companies or sectors you want to invest in or the best-suited investments to diversify existing portfolio assets.
Both schemes have positives and negatives. The SEIS may be seen as more favourable, given the 50% income tax relief, somewhat higher than the 30% relief available through the EIS. However, the lower annual investment caps and the elevated risk of a very early-stage business balance this out.
EIS companies must have no more than 250 members of staff and have been trading for seven years at most. While this means an eligible firm will not be a large, long-established business or have been ‘tested’ on the stock market, this is not an insignificant amount of trading history to make investment decisions against.
That said, the risk remains high, and an investor could see SEIS share values appreciate incredibly quickly and faster than EIS shares when they invest in a start-up with exceptional growth prospects and scalability.
Neither EIS nor SEIS investments guarantee returns, and the nature of investment in entrepreneurial and smaller, younger businesses is naturally higher risk, hence the tax incentives introduced by the government to support this section of commerce.
Why Decide to Invest in EIS or SEIS Shares or Funds?
Investment portfolios without any venture capital assets or with very little can be diversified while investing in exciting, innovative and promising young companies. Investors might pick fund investments with a spread of assets across varied sectors or one specific company they think has potential or operates in an area of interest.
Diversified investment funds are less risky since if one company within the fund fails, this may be offset by positive performances elsewhere. In contrast, investing directly in shares means that the investor could lose all of their invested capital, loss relief and tax reliefs already claimed notwithstanding.
It is also important investors understand their eligibility rules, such as having no connection or personal interest in companies or funds they invest in and retaining shares for minimum periods to ensure tax reliefs remain claimable.
Disclaimer: The information and opinions within this article are for general information purposes only, are not intended to provide an exhaustive summary of all relevant issues or to constitute investment, tax, legal, or other professional advice. They should not be relied on for, or treated as, a substitute for specific advice relevant to particular circumstances and you should seek your own investment, tax, legal or other advice as appropriate. In not doing so you risk making commitments to products and/or strategies that may not be suitable to your needs. Neither the writer nor EMV Capital Limited accept any responsibility for any errors, omissions or misleading statements in this article or for any loss which may arise from reliance on materials contained on this article.