SEIS and EIS schemes: What’s the difference and which one is right for you?

By January 15, 2020 January 16th, 2020 Insights
SEIS & EIS Schemes

Looking for funding for your startup? Perhaps you are thinking about investing in them in 2020? The UK government wants to foster innovation and encourage entrepreneurs to start companies. One of the ways is by ensuring private investors find investing in startups appealing and this is where the SEIS and EIS schemes come into play.

The venture capital schemes offer important tax incentives to investors, making the process of seeking funding a bit easier. Because it makes investing a bit more appealing, the schemes aim to encourage investors to invest in companies that might be smaller and come with higher risks. Although the schemes are similar in terms of purpose, there are important differences to know about.

The Seed Enterprise Investment Scheme (SEIS)

The SEIS scheme is focused on early-stage companies with the emphasis being on startups at the very early stage of their development. With the SEIS scheme, an individual investor can:

  • Invest up to £100,000 per tax year
  • Receive a 50% tax break in return of the investment
  • Avoid any Capital Gains Tax on profits
  • Get a Capital Gains Tax relief when reinvesting profits made from a previous SEIS-qualifying company investment

A company can raise a maximum of £150,000 in SEIS funding.

The Enterprise Investment Scheme (EIS)

On the other hand, the EIS scheme is aimed at medium-sized startups. It aims to support those startups that have already laid the foundation and are now looking to scale the business. With the EIS scheme, an individual investor can:

  • Invest up to £1 million per tax year
  • Receive a 30% tax break in return
  • Pay no Capital Gains Tax on the profit arising from the sale of shares after three years

The maximum funding a company can raise in EIS funding is £5 million per year.

What are the similarities between the schemes?

There are certain similarities to the schemes. Both schemes benefit from Inheritance Tax exemption and the ability to offset the loss of selling shares against Capital Gains Tax apply to both the SEIS and EIS schemes. Likewise, there are rules against how much the investor can hold in terms of shares. Under both the SEIS and EIS schemes, the individual investing can hold up to 30% of the company’s overall shares and they must not be connected to the company in a Director or Employment capacity. Investors also need to hold on to the shares for a minimum of 3 years – selling earlier could potentially lead to investors having to pay back the relief they’ve enjoyed.

What companies qualify for the SEIS and EIS schemes?

A startup can’t just offer either of these schemes to investors. First, the company has to be a qualifying type of company, as certain companies are excluded from these schemes. Excluded trades include companies:

  • Dealing in land or commodities
  • Involved with banking, insurance or money-lending
  • Providing legal or accountancy services
  • Working in property development
  • Involved in generating and exporting electricity

It’s worth noting that companies are only excluded using SEIS and EIS schemes if a substantial part of their activity involves any of the excluded activities. Substantial is defined as anything above +20% of their trade activity.

In addition, a startup must go through several tests before qualifying for the schemes. These include things like having a sufficient amount of employees. A detailed rundown of what is required can be found on the government website: here is the guide for the SEIS scheme and here for the EIS scheme.

If a company qualifies for either of the schemes, the investment must always be used for qualifying business activity. This means using the funds to promote the growth and development of the business. In practice, this could be hiring new employees or marketing the product or service.

Choosing the scheme for your startup

How do you know which scheme to use? While there are similarities to both the SEIS and EIS schemes, the big difference for startup owners is the kind of company the schemes are aimed for. SEIS is suited for you if your startup is just launching and in need of that initial push, while EIS can be used at a later stage of your startup. SEIS shares must always be issued before EIS funds – you can’t receive SEIS funding if you’ve already used the EIS scheme.

As an investor, selecting the right scheme under which to invest depends mainly on the amount you’d like to invest and your current investment portfolio. Of course, for investors, the main thing is always finding the right startup to invest in. If you are more concerned about tax planning, then it is a good idea to talk to a professional and go over your options.

Find help with SEIS and EIS schemes

If you are launching a startup and looking to invest, it’s important to seek out help available to you. Likewise, investors should spend enough time making sure they find the right investment opportunities but also take advantage of available tax schemes to allow more flexible investing. Organising your finances right can help you focus on growing your business as well as ensure you make the most with your investments – a sound financial foundation is key to success.

At Devonshire Green, we have worked with startups and individual investors alike. We can help you with things like funding, financial management, and tax planning whether you are running a small business or are a private investor. We can provide you with tips and tools to help you make the most with your money. Contact us today and let’s look at your funding and investment options!