Are you looking to reduce your tax bill?
As a forward-thinking accountancy firm, we pride ourselves on finding the best ways to become more tax efficient. We aim to save our clients more money on tax than they spend on our fixed fees.
With this in mind, two such opportunities in recent years are the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
In this article, we’ll explore both options and explain how you can significantly reduce your tax bill.
What is the Enterprise Investment Scheme?
The idea behind the Enterprise Investment Scheme (EIS) is simple. The UK government wants to encourage private investment into smaller companies to aid their growth and stimulate the British economy. The EIS is their means of doing that by providing a generous tax relief to qualifying investors.
Which companies are eligible for EIS?
To be eligible for EIS, companies:
- Must be unlisted (not on the main London Stock Exchange, or any other)
- Must not be controlled by another company
- Must not control any non-qualifying subsidiaries
- Must have gross assets of ≤ £15 million before investment and ≤ £16 million after
- Must have fewer than 250 employees
- Must not raise more than £5 million per year under EIS/SEIS/VCT combined, and no more than £12 million total
- Must have a permanent base in the UK
- Must not have been trading for more than seven years
The rules and thresholds change slightly for knowledge-intensive companies.
If you’re a business owner and you think your company may qualify for investment under the scheme, we suggest reading the excellent guide from the British Business Bank to learn more about applying.
What tax relief do EIS investors receive?
If you invest in an EIS-qualifying company, you can get quite substantial tax reliefs.
Income tax relief
As long as you’re not connected with the company, you can claim income tax relief of 30% of the amount that you invest in qualifying EIS companies. This is up to a limit of £1 million each tax year (or up to £2 million if at least £1 million of that is invested in knowledge-intensive companies). Thus, a £10,000 investment would result in a £3,000 reduction in your income tax liability.
The connected persons tests are complicated. For example, directors cannot claim EIS tax relief if, at the time the shares are issued, they are a paid director of the company unless the payment is a ‘permitted payment’. They may, however, become a paid director after their investment under the ‘business angel’ rule.
Capital gains exemption
The value of your investment may grow over time if the business you choose is successful. Normally, this would incur a capital gains tax liability, should you decide to sell.
However, capital gains from EIS-qualifying companies are exempt from tax, provided that:
- The shares are held for at least 3 years
- The company still qualifies for EIS
Loss relief
The EIS scheme is for startups and early-stage businesses. Naturally, many of these types of businesses fail. So, first and foremost, please be careful and seek professional advice before proceeding with any investment.
However, if your investment fails, then you can offset your loss against income tax.
Capital gains deferral
If you have a wider portfolio of investments, it’s possible to defer capital gains on any asset disposal within your portfolio by reinvesting the gain in qualifying EIS shares.
Inheritance tax relief
After 2 years, EIS shares qualify for Business Relief. This means the shares will qualify for relief from inheritance tax if you were to pass away.
This used to be 100% relief, but from April 2026, that will be limited to the first £1 million of qualifying assets. The remainder will be eligible for 50% relief.
That means, if you held £2 million worth of EIS shares upon passing:
- The first £1 million qualifies for 100% Business Relief, so it’s completely exempt from inheritance tax for your beneficiaries.
- The remaining £1 million qualifies for 50% relief, so only £500,000 is chargeable to inheritance tax.
- At the standard IHT rate of 40%, your estate would face a tax bill of £200,000 on those shares, instead of £800,000 if there were no relief at all.
What is the Seed Enterprise Investment Scheme?
The Seed Enterprise Investment Scheme (SEIS) takes the principle of the EIS a step further. It allows investors to put their money into very early-stage, “seed” companies. This comes with even greater tax reliefs, but it’s also much riskier.
Which companies are eligible for SEIS?
SEIS-eligible companies are much smaller in scale compared to EIS-eligible companies. To be eligible for SEIS, companies:
- Must be unlisted (not on the main London Stock Exchange, or any other)
- Must not be controlled by another company, or have ever been so
- Must not control any non-qualifying subsidiaries
- Must have gross assets of ≤ £350,000 before investment
- Must have fewer than 25 employees
- Must not have previously raised money from the Enterprise Investment Scheme (EIS) or from a venture capital trust (VCT)
- Must have a permanent base in the UK
- Must not be a member of a partnership
What tax relief do SEIS investors receive?
If you invest in an SEIS-qualifying company, you can get much larger tax reliefs, although the total investment allowance is capped at £200,000 per year.
Income tax relief
Again, you must not be connected to the company to claim income tax relief under SEIS.
But as long as you meet the criteria, you can claim income tax relief of 50% of the amount that you invest in qualifying SEIS companies. Thus, a £200,000 investment would result in a £100,000 reduction in the investor’s income tax liability.
Capital gains exemption
Same as with EIS shares, any growth in the value of your investment is exempt from capital gains tax provided that:
- The shares are held for at least 3 years
- The company still qualifies for SEIS
Loss relief
If your investment fails, then you can offset your loss against income tax.
For example, say you invest £20,000 in a SEIS company. You immediately get £10,000 back as 50% income tax relief. If the company fails, you can claim loss relief on the remaining £10,000. At 45% tax, this gives you £4,500 back. So your real loss is only £5,500, not the full £20,000.
Capital gains reinvestment relief
Under SEIS, you can claim 50% capital gains tax (CGT) reinvestment relief. This means if you realise a gain elsewhere (say £10,000 from selling shares) and reinvest it into SEIS, half of that gain (£5,000) becomes exempt from CGT, reducing your tax bill. Remember that any profit you make when selling your SEIS shares after 3 years is completely free from CGT, so this an effective route for reducing CGT liabilities long-term (but carries a high level of risk).
Inheritance tax relief
After 2 years, SEIS shares qualify for Business Relief. This means the shares will qualify for 100% relief from inheritance tax if you were to pass away.
The same IHT relief rules apply for SEIS as they do for EIS.
Need more information?
We offer a wide range of services for individuals and businesses interested in tax-efficient investments.
If you want to learn more about how the team can help or simply want some start-up advice from a trusted accountant, please don’t hesitate to contact us for a free consultation.