One of the reasons why more and more people are looking at equity crowdfunding sites for their new investment opportunities is because these companies are eligible for the tax relief schemes for their investors. The Government wanted to encourage investors to invest in startups and SMBs, so introduced two tax relief schemes – EIS, the Enterprise Investment Scheme, and SEIS, the Seed Enterprise Investment Scheme. There are conditions that need to be met in order to qualify for the schemes, but both offer significant tax reliefs.
What Are SEIS And EIS?
Both schemes have been designed to encourage equity investment in companies who would otherwise struggle to find traditional investors. These companies would traditionally be seen as a risky investment.
SEIS was designed to encourage investment in small startups at the seed stage. EIS is aimed at unquoted companies who need to raise finance, and offers the qualifying investors a range of tax benefits.
What Tax Relief Is Available?
In both schemes, the tax relief is given by reduce the tax liability of the investor. It’s deducted from the income tax liability. It cannot reduce the tax liability below nil, so it cannot create an income tax loss. There is an annual investment limit of £1 million for EIS, however, an additional £1 million can be invested in specific Knowledge-Intensive companies annually, as of 5 April 2018. There is an annual investment limit of £100,000 for SEIS. The rate of relief for EIS is 30%, and the rate for SEIS is 50%. Both schemes will allow share subscriptions to be treated as though they were made in the previous year for the purposes of income tax relief.
Can The Reliefs Be Withdrawn?
Yes, there are some circumstances where the income tax relief could be withdrawn. Both schemes state that the eligible shares must be held for a minimum of three years. Offloading the shares sooner would result in the tax relief being withdrawn.
Is There Capital Gains Tax Relief Available?
Any shares held under the EIS, or SEIS schemes are exempt from Capital Gains Tax when they are sold, if they have been held for at least three years.
You can also defer the CTG on gains received for disposing of any asset, if those gains are reinvested in qualifying EIS shares. Any reinvestment must be made within three years after the sale of the asset. This will also apply if the investment was made in the year prior to the sale.
SEIS allows you to treat 50% of a chargeable gain as exempt, if the proceeds are reinvested in SEIS shares. As with EIS reinvestment, this relief can be carried back to the previous tax year.
Do Foreign Companies Qualify?
Some foreign companies will qualify, if they meet the same requirements set out for UK companies. This means that the non-UK company would have to issue shares, and have a permanent establishment in the UK. This could be a branch, building site, office, or workshop. This could also be proved if they had an agent in the UK, who acts on their behalf.