Introduction

The Enterprise Investment Scheme (EIS) and Seed EIS (SEIS) are both intended to help small, higher-risk unquoted trading companies raise capital. The schemes do this by providing a range of tax reliefs to individuals who subscribe for shares. Detailed conditions must be met by both the investor and the company over a prescribed period and any relief given may be clawed back if these conditions cease being met. 

SEIS offers more generous tax reliefs than EIS but is available on investments into much smaller companies than EIS. An overview of both schemes is set out below. 

Tax reliefs and exemptions

EIS

The following forms of tax relief and exemption are available on the making of an EIS investment: 

• Income tax relief of 30% on the amount subscribed for EIS shares. The maximum relievable investment is £1million per annum, or up to £2million if the additional £1million is invested into ‘knowledge intensive’ companies. Relief can be carried back to the previous tax year, subject to being within the annual limit. 

• Capital Gains Tax (CGT) exemption on disposal of EIS shares on which income tax relief has been claimed. 

• CGT deferral is available on gains made on disposal of other assets. Gains can be deferred if they were realised in the three years before or one year after the share subscription. Deferred gains come back into charge on sale of the EIS shares or if the relevant conditions cease being met.  

SEIS

The following forms of tax relief and exemptions are available on the making of a SEIS investment: 

• Income tax relief of 50% of the amount invested, up to a maximum investment of £200,000 per annum. As with EIS, SEIS relief can be carried back to the previous tax year, subject to the £200,000 annual limit.

• CGT exemption on disposal of SEIS shares on which income tax relief has been claimed. 

• CGT re-investment relief can apply if income tax relief is claimed. This relief reduces capital gains made on disposal of other assets by 50%. The reduced amount of gain does not subsequently become chargeable so effectively becomes exempt. The maximum gain reduction is £100,000 per annum. The gain must arise in the tax year in respect of which SEIS income tax relief is given (i.e. either in the tax year of investment or the preceding tax year if a carry back claim is made). The remaining 50% of the gain remains chargeable. 

Withdrawal of reliefs and exemptions

The EIS and SEIS reliefs and exemptions outlined above may be wholly or partially withdrawn if the requisite conditions are not met for the prescribed period. This, broadly, means for three years following the making of an investment, though the time period may differ if the company has not commenced trading at the date the investment is made. Both the investor and the company must meet conditions, which means that tax reliefs and exemptions may be lost through no fault of the investor. 

International aspects

EIS and SEIS Income tax reliefs are available to both UK and non-UK resident individuals. The CGT exemption is also available regardless of residence, though is typically only relevant to UK residents as non-UK residents are normally not within the scope of CGT on disposal of shares. 

Non-UK residents who make a qualifying SEIS investment are eligible for the 50% exemption on gains realised on disposal of other assets. This may be relevant if a non-UK resident has realised a gain which is subject to CGT, such as a gain on disposal of UK land. 

EIS CGT deferral relief is only available to UK residents, and a deferred gain may be subject to CGT if an individual who has claimed EIS deferral relief ceases UK residence. 

Inheritance tax

EIS and SEIS shares may be eligible for business property relief from inheritance tax after they have been owned for at least two years. This is not part of the EIS or SEIS: relief may be available due to overlap with the conditions that must be met for business property relief from inheritance tax to be available.

Conditions to be met 

Various conditions must be met for both EIS and SEIS. There is a high degree of overlap between the conditions that must be met for the two schemes, though there are some points of difference. Key points include: 

• With the exception of EIS CGT deferral relief and inheritance tax business property relief, the EIS and SEIS reliefs and exemptions are only available to investors who are not ‘connected’ to the company. Among other factors, individuals are connected if they have more than a 30% interest in a company. Interests of ‘associates’, such as some relatives, are taken into account when determining an individual’s percentage interest. Investors cannot be employees of the company and for EIS purposes can only be a director in some circumstances.  

• Relief is only available on investments into trading companies that have long-term objectives to grow and develop their trade. EIS and SEIS are unavailable where the investee company carries on “excluded activities” to a substantial extent. This includes, but is not limited to, dealing in land and property development. 

• For both EIS and SEIS, relief is only available if, by making the investment, the investor’s capital is put at risk so that an overall loss could arise, considering the net investment return, loss of capital and tax reliefs.

• The reliefs are only available on subscriptions for fully paid-up new ordinary shares that do have any terms that seek to limit an investor’s risk. 

• The company must be unquoted. Companies listed on the Alternative Investment Market (AIM) are regarded as unquoted for this purpose. 

• For SEIS, the company must have gross assets of at most £350,000 when the SEIS investment is made. EIS reliefs are available into much larger companies, with up to £15millon of gross assets pre investment and £16million afterwards. 

• In order to be eligible for SEIS companies can only have been trading for a maximum of three years before a SEIS investment is made. EIS is usually available on investments into companies that have been trading for up to seven years, though relief may be available for later investments into older companies some cases. 

• Companies may qualify as ‘knowledge-intensive’, such that investors may be eligible for the higher annual EIS investment limit, if conditions are met which, broadly, relate to the company’s research and development expenditure, creation of intellectual property and/or the number of skilled employees.

Commercial issues 

Whilst they are attractive, the tax benefits of EIS and SEIS investments are only one point of which a potential investor should be aware. Notably: 

• EIS and SEIS investments carry significant investment risk, so it is essential that appropriate investment advice is taken from an FCA authorised advisor. 

• The initial tax reliefs are only available on subscription for new shares and so there are unlikely to be many potential purchasers of second-hand EIS and SEIS shares. This means that it can be difficult to sell the shares.

Claims 

Income tax relief and CGT deferral/re-investment relief must be claimed. The claim deadline is typically five years and ten months of the end of the tax year of the investments is made. Claims can only be made once the relevant EIS / SEIS 3 certificate has been issued by the company. 

If relief is to be carried back and claimed in respect of the tax year before the investment is made, the deadline for making the claim is four years and ten months from the tax year in which the investment is made. 

EIS sunset clause

EIS relief is currently legislated to apply to share subscriptions made up to 5 April 2025. However, at the Autumn Statement (22 November 2023), the government announced that it will legislate to extend the operation of the EIS relief scheme from 6 April 2025 until 6 April 2035.   

No sunset clause applies for SEIS purposes, and so relief will remain available post-5 April 2025.