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EIS and SEIS investors receive tax incentives to buy shares in small businesses.
EIS was introduced in 1994 and has been part of the UK tax system for some time.
It promotes investments in entrepreneurial ventures and unlisted companies through significant tax breaks.
Eligible Reliefs are for a cap of £ 1 million EIS mutual funds, one person, one year, or £ 2 million for investments where 50 percent has been invested in knowledge-intensive companies.
The maximum investment that you can claim through SEIS is £ 100,000.
Here we explain how the EIS and SEIS tax relief works and how you can assert your full entitlement through your self-assessment tax return.
Tax relief for EIS and SEIS investments
The exact tax breaks available are as follows (although your relief value may vary depending on your tax bracket):
|Maximum taxable annual investment||£ 1m or £ 2m if at least half is invested in a knowledge-intensive company||€ 100,000|
|Eligible Percentage||30 percent||50 percent|
If you pay tax as an employee via PAYE, you have to register with the HMRC for self-assessment, as your employer does not automatically apply for the tax reduction.
Individuals who already submit self-assessment forms do not need to register or do anything other than include these facilitations on their next return.
Note that you can carry over part or part of your investment to the previous year if you have not reached the upper limit.
The limit is £ 1m per tax year for EIS and £ 100,000 for SEIS.
There are other benefits such as deferred or exempt capital gains tax on the sale of your investment property and the ability to reclaim any losses incurred.
EIS and SEIS tax breaks for capital gains
Capital gains tax breaks apply to 100 percent of the EIS investment and 50 percent to the SEIS program, which is capped at £ 50,000 for the latter.
EIS capital gains taxes can be deferred, while SEIS is exempt from capital gains tax and profits on the sale of your shares are not taxable if you have received an income tax break.
Capital gains taxes payable are not due immediately when using the profits from an EIS investment to invest in another qualifying company, provided that you reinvest between one year before and three years after the sale.
Tax relief illustration
To show how this works in practice, let’s look at an example where a taxpayer is investing £ 10,000 in an EIS company at the additional 45 percent tax rate.
|EIS Business Folds||EIS stocks keep their value||EIS stocks double in value|
|Investment value||£ 10,000||£ 10,000||£ 10,000|
|Eligible for income tax exemption||£ 3,000||£ 3,000||£ 3,000|
|Net investment||£ 7,000||£ 7,000||£ 7,000|
|Capital gain||0 €||£ 10,000||£ 20,000|
|Entitled to claim damages||€ 3,150||N / A||N / A|
|Capital gains tax||N / A||0 €||0 €|
|Net profit or loss, including tax breaks||– £ 3,850||£ 3,000||£ 13,000|
Compared to a conventional system outside the EIS system, if the value of the shares doubled, the capital gains tax to be paid would amount to 20 percent of the profit.
How to apply for EIS or SEIS tax relief
The first step is to make sure that every company you invest in qualifies for EIS or SEIS.
If the company has not yet completed the raise or is crowdfunding, you will usually find that it is categorized as pre-cover.
This means that HMRC has provisionally approved its application, as the tax office can only grant SEIS or EIS full status once investments have been made and qualify for discharge.
Pre-hedging is not mandatory, but it is hedging as the process involves a decision by the Small Companies Enterprise Center (SCEC) as to whether the company is eligible.
Another criteria to ensure that your investment is discounted is the limit on share purchases, which cannot exceed 30 percent of the common shares.
After your investment, the investee will issue a certificate of conformity that lists the system conditions and the number of years you must hold the shares.
You need your certificate before you can claim tax relief.
When you can take advantage of a tax break
Investors can assert claims if:
- The deal has been trading for four months or more
- The company has spent 70 percent of the capital invested.
The SCEC provides the company with SEIS3 or EIS3 application forms, which it in turn forwards to the investors.
Please note that the application form is not a stand-alone document and must be submitted with a tax return for self-assessment.
You can claim tax relief for up to five years after the next January 31st after the end of the tax year in which you made your investment.
The HMRC needs several pieces of information to support your application for tax relief, including:
- Name (s) of the company (s) invested in.
- Values invested and against which you claim relief.
- The date the company issued your shares (not necessarily the same date as the investment transaction).
- Details from the SEIS3 or EIS3, such as B. a reference code and which HMRC authority authorized the certificate.
Submitting EIS or SEIS tax relief requests
When preparing your self-assessment statement, you must use the Additional Information pages and enter the investments made in box 2 on page Ai 2.
In the Other Information field on page TR 7, field 19, enter the investment details, including the unique investment reference on your certificate and the requirements listed above.
If you have made an EIS or SEIS investment and have not yet received your certificate, you cannot claim relief.
However, you can do this in the next period, provided that you have the papers by then (certificates are usually issued around four months after the increase has expired).
Frequently asked questions about applying for EIS and SEIS tax breaks
Can anyone invest in a SEIS or EIS company?
There are some caveats, such as the EIS rule, that investors cannot be connected to the company they invest in – for example, if they are employed by the company or have a financial stake.
All connections within two years of the stock issue and up to three years after the investment will void the claim.
Affiliates include partners and directors, although unpaid directors are still eligible for tax breaks.
A financial interest is classified as an interest of 30 percent or more in the company or a subsidiary, including voting rights, property rights, or share capital.
Investors’ partners and partners cannot hold any stakes.
What is loss compensation on an EIS or SEIS investment?
Tax breaks under these systems apply to losses and the investment itself, and capital gains discounts to gains made.
If your EIS or SEIS shares lose value or the business fails, you can offset that loss against your income tax or capital gains tax liability.
Losses can be claimed either in the same year or in the following tax period in addition to other tax breaks to which you are entitled.
Investors are entitled to loss compensation if their investment value falls below the effective cost.
You can calculate the effective cost by taking your invested amount minus the income tax relief already claimed.
For example, an EIS investment of £ 20,000 with tax relief of £ 6,000, or 30 percent, means your effective cost is £ 14,000.
Can I get EIS Loss Relief if I have an EIS Portfolio?
Some mutual fund managers build portfolios of EIS system participants. However, each company is a separate investment for tax relief.
Therefore, if an investment in a larger portfolio makes a loss, it is likely to qualify for loss compensation regardless of the performance of the rest of the portfolio.
Which shares are eligible for the SEIS tax relief?
The shares must be new common stock with no privileges and must be fully paid up in cash to qualify.
If you invest in shares by way of a capital transfer, there is no tax break.
Investors also cannot use credit to purchase stocks if they took out the borrowing solely to fund the investment.
From March 2018, qualified investments must be made with risk capital.
What is the difference between EIS and SEIS tax breaks?
EIS is the Enterprise Investment Scheme that helps smaller and riskier companies raise capital finance by offering tax breaks to investors buying new shares in a qualifying company.
You can invest up to £ 1 million each tax year and enjoy 30 percent tax relief, although you must keep your shares for at least three years.
SEIS is the Seed Enterprise Investment Scheme, which was introduced in 2012 to encourage start-up investments in new companies or companies in their early stages.
Investors can apply for 50 percent tax relief on investments up to £ 100,000 and benefit from capital gains tax exemption on any gains made on these shares.
Eligible companies can raise up to £ 150,000 through SEIS and directors can become investors.
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