SEIS and EIS in plain English

The UK government wants private money to reach young companies, so it shares some of the risk. It does this through two schemes: the Seed Enterprise Investment Scheme (SEIS) for the very earliest companies, and the Enterprise Investment Scheme (EIS) for those a little further on.

This is a plain summary for UK taxpayers. Tax rules change and depend on your circumstances, so check the current guidance from HMRC and take advice before you rely on any relief.

What an investor gets

Both schemes also have a relief for capital gains you have made elsewhere. EIS lets you defer a gain by reinvesting it. SEIS exempts half of a reinvested gain.

What that means in pounds

Suppose you invest £10,000 in a company that qualifies for SEIS.

• You claim £5,000 off your income tax bill. Your real cost is £5,000.
• If the company fails completely, you can claim loss relief on the remaining £5,000 at your income tax rate. For a taxpayer at the 45% rate that is worth a further £2,250, leaving an actual loss of £2,750.
• If the company succeeds and you sell after three years, the gain is free of capital gains tax.

With EIS the first step is 30%, so the same £10,000 costs £7,000 after relief, and the worst case for a 45% taxpayer is a loss of £3,850.

These figures assume you have paid enough income tax to use the relief, and that the company keeps its qualifying status.

What is asked in return

The reliefs come with conditions. The main ones for an investor:

• You must hold the shares for at least three years. Sell earlier and the income tax relief is withdrawn.
• The company must qualify, and keep qualifying. There are limits on its age, size, number of employees, how much it can raise and what trade it carries on. If it breaks the rules during the three years, relief can be lost.
• You must not be too closely connected to the company. Broadly, you and your associates cannot hold more than 30%, and employees generally cannot claim. Directors are treated differently under each scheme.
• The shares must be new, ordinary and paid for in cash. Buying existing shares from another shareholder does not count.
• You need the certificate. The company sends you a compliance certificate (SEIS3 or EIS3) after HMRC approves its application. You cannot claim without it.

Many companies apply for advance assurance before they raise money. It is HMRC's indication that the company looks likely to qualify. It is worth asking for, and it is not a guarantee.

The mistake the schemes invite

Tax relief makes a loss smaller. It does not make a weak company strong.

It is easy to look at a 50% relief and feel that half the risk has gone. But most very early companies fail, and losing 27p or 38p in the pound many times over is still losing. Investors who do well with these schemes choose the company first and treat the relief as a cushion, not as the reason.

A simple test: would you make this investment at a lower amount with no relief at all? If the answer is no, the relief is doing your thinking for you.

Questions to ask a founder

1. Do you have advance assurance, and for which scheme?
2. How much have you already raised under SEIS and EIS?
3. Who is handling the compliance statement after the round, and when should I expect my certificate?
4. Is anything planned in the next three years that could affect qualifying status, such as a change of trade or a sale?

A founder who answers these easily has done this properly. One who has not heard of the certificate needs an accountant before they need your money.

For readers outside the UK

Other countries have their own incentives. The United States, for example, has a relief for gains on qualified small business stock held for a required period. The principle travels even where the rules do not: understand the relief, confirm the company qualifies, and never let the tax decide the investment.