How to invest in Seed EIS

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How to invest in Seed EIS

Among the criteria for a company to be considered in a Seed EIS is that it has fewer than 25 employees and has been trading for less than two years.

These are often known as start-ups or early stage companies, so naturally the risk for the investor is higher than with those businesses which have been established for longer.

For this reason, the tax reliefs on SEIS are very attractive but it is wise to always seek advice before dipping a toe into this form of investment scheme.

The income tax relief available on the amount invested stands at 30 per cent for EIS and 50 per cent for SEIS, as long as the investor pays an equivalent amount of income tax in the same tax year, Mary Tierney, tax director at Bennett Brooks explains.

The main differences between EIS and SEIS are illustrated in the infographic below.

Figure 1: The benefits for individuals of investing through EIS and SEIS

Source: The EIS Association

Ms Tierney notes: “The SEIS reinvestment rules are slightly different, allowing a permanent capital gains exemption for 50 per cent of the investment. Chargeable gains made in the three years before and 12 months after the investment are eligible for reinvestment relief. 

“The exemption is dis-applied if the SEIS shares are sold or transferred within three years of issue, or the investor (or their associate) receives value from the SEIS company during the period 12 months before and three years after the issue of the SEIS shares.”

As Bruce Macfarlane, managing partner at MMC Ventures, says: “It’s probably a very good way of encouraging investors to think about risk and get involved in start-up companies. 

“Clearly, the tax scheme makes it much more palatable because, particularly with SEIS, you have to assume a very high failure rate.”

Getting access

So how does it work?

Mark Brownridge, director general of the EIS Association, explains: “Seed EIS and Social Investment Tax Relief-qualifying (SITR) investments can be accessed in the same way as EIS - through funds, portfolio services and on a single investment basis. 

“Some EIS fund providers also manage Seed EIS and SITR funds. There are also dedicated Seed EIS and SITR specialist providers.”

He points to an interesting feature of SITR investments which is that it can be structured as a loan or equity, whereas EIS and Seed EIS is equity only. 

SEIS offer greater income tax relief benefits than EIS but are considerably higher risk, generally being start-ups.Charles Owen

“SITR equity investments provide the same tax reliefs as EIS, though loan arrangements only provide loss relief against capital, not income, and do not provide IHT exemption,” he adds.

Clients may be unfamiliar with Seed EIS and SITR, but this is no surprise. Some in the industry believe there has not been enough promotion of these vehicles, perhaps because they are so niche, while others suggest perhaps it is not as useful as other forms of tax efficient investment.

Charles Owen, director of CoInvestor, points out: “SEIS offer greater income tax relief benefits than EIS but are considerably higher risk, generally being start-ups.

“At present SITR is less widely known as fewer fund managers are promoting it due to lower total investment ceilings. It is presumed that SITR will shortly come in line with EIS in this regard and will then unlock greater investment activity.”

Tim Smith, tax partner at RSM UK, acknowledges there has been very little take-up and suggests this could be due to a missed opportunity.

There has been an extremely limited take-up of the SITR so it would seem that either it is not attractive to the relevant organisations, or there is a general lack of awareness.Tim Smith

He explains: “Seed EIS is most commonly accessed where individuals invest in the businesses being set up by their family and friends, as well as via some crowdfunding. 

“Unfortunately there is, arguably, a missed opportunity due to the combination of the restriction in the investment limits as well as the complexity of the legislation, so the very generous tax reliefs that are potentially available are not utilised as much as they could be.”

He goes on: “In our experience, there has been an extremely limited take-up of the SITR so it would seem that either it is not attractive to the relevant organisations, or there is a general lack of awareness.”

Bigger picture planning

It goes without saying investors should seek financial advice when it comes to any type of EIS fund.

Ms Tierney remarks that while there are basic rules around investing in SEIS, “what is more interesting is what can go wrong, and unfortunately there are a lot of complex rules to work through”.

Jonothan McColgan, director and chartered financial planner at Combined Financial Strategies, reminds advisers and their clients that these types of schemes are unregulated, so there is no comeback if an investor finds themselves falling for a scam or investing in an EIS that underperforms.

“A financial adviser will look at how it fits into your tax position and overall portfolio,” he says. 

“The financial planner helps look at the bigger picture of all your finances. Then the adviser is liable for suitability [of] advice.”

eleanor.duncan@ft.com