What are the benefits of EIS and SEIS for investors?
Income Tax relief
Income Tax relief is given via a reduction of your tax liability, of an amount equal to 30% of your investments in qualifying EIS companies, with a limit of £1million of investments per tax year. This limit is increased to £2million per tax year for investments in knowledge intensive companies. The tax reducer is increased to 50% of qualifying investments in SEIS companies, although the limit per tax year is reduced to £100,000.
The relief can reduce your tax liability for the year investments are made, or the previous year, to nil, but can never exceed your tax liability for the year so as to create a loss. However, if the shares in qualifying EIS or SEIS companies are disposed of within three years, there will be a ‘clawback’ of the tax reduction, of an amount equal to the disposal proceeds multiplied by the original rate of relief (either 30% or 50%), up to a maximum of the original tax reduction.
Capital Gains Tax reliefs
For EIS shares, you can defer a capital gain made on any asset by reinvesting the disposal proceeds into qualifying EIS shares, so long as the reinvestment is made between 12 months before and 36 months after disposal. The deferred gain will subsequently become chargeable on the earliest of:
- Disposal of the EIS investment;
- The company breaching any of the conditions for being an eligible EIS company; or
- You becoming non-UK resident.
For SEIS shares, reinvestment relief is available, on 50% of the investment which qualifies for income tax relief, capped at £50,000. In this case, a gain made on the disposal of any asset can be reinvested into qualifying SEIS shares in the same tax year, and 50% of the available SEIS expenditure becomes a tax-exempt gain (not just a deferral). The available SEIS expenditure is the lowest of:
- The gain;
- The amount reinvested on which SEIS income tax relief is claimed; or
- A specific amount claimed.
Furthermore, if the EIS or SEIS shares are held for at least three years, and income tax relief was obtained on the original investment, any gain upon disposal of the shares will be exempt from CGT.
If a loss is made on disposal of the shares, the loss (less any income tax relief received) can be offset against your net income for the year, reducing your taxable income and therefore your liability.