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What Are EIS and SEIS?

Business · December 2, 2023 · Tom Bennett · 6 min

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A UK guide to the Enterprise Investment Scheme and Seed Enterprise Investment Scheme: what they are, the tax reliefs for investors, the rules for companies, and how they help startups raise money.

Early-stage companies are risky to invest in, and that risk is exactly why so many promising startups struggle to raise money. To bridge the gap, the UK government offers two generous tax schemes — SEIS and EIS — that reward investors for backing young companies by reducing their tax bill and softening the blow if things go wrong. For founders, understanding these schemes can be the difference between a stalled raise and a funded one. This guide explains what EIS and SEIS are, the reliefs on offer, the rules for companies and investors, and how it all works in practice.

This article is general information, not financial or tax advice. The rules are detailed and change over time, so check current HMRC guidance and take professional advice before investing or raising money.

What EIS and SEIS are

EIS (the Enterprise Investment Scheme) and SEIS (the Seed Enterprise Investment Scheme) are UK government schemes that give income and capital gains tax reliefs to investors who buy shares in qualifying early-stage companies. They are part of a family of venture capital schemes designed to encourage private investment into smaller, higher-risk businesses that might otherwise struggle to attract funding.

The two schemes work on the same principle but target different stages. SEIS is aimed at companies right at the start of their life and offers the most generous reliefs, reflecting the high risk of backing a brand-new venture. EIS supports companies that are a little more established but still young and growing, with somewhat lower relief rates but higher investment limits. Many companies use SEIS for their first outside investment and then move to EIS for later rounds.

The reliefs for investors

The appeal for investors lies in a package of tax reliefs that reduce both the cost and the downside of investing. The headline reliefs are:

• Income tax relief — investors can claim back a percentage of the amount they invest against their income tax bill: 50% under SEIS and 30% under EIS, subject to annual limits.
• Capital gains tax (CGT) exemption — any gain on the shares is free of CGT if the conditions are met and the shares are held for the qualifying period.
• Loss relief — if the company fails, investors can offset the loss (net of income tax relief already received) against income or gains, cushioning the blow.
• CGT reinvestment reliefs — gains from other assets can, in some cases, be deferred (EIS) or partly exempted (SEIS) by reinvesting through the scheme.

The combination of upfront relief and downside loss relief is what makes these schemes so powerful: it sharply reduces an investor's real risk.

Taken together, these reliefs mean an investor's effective exposure is far smaller than the cash they put in. That changes the risk calculation dramatically and is precisely why these schemes are so attractive to UK angel investors. The exact benefit always depends on the individual's tax position and the rules in force, so the figures above are a guide rather than a promise.

The rules for companies

To offer these reliefs, a company must qualify — and the conditions are detailed. While the precise thresholds change over time and should be checked against current HMRC guidance, the broad requirements cover:

Certain activities are excluded — for example, dealing in land, financial activities, and various others — so not every business can use the schemes. The company must also genuinely use the money to grow and develop its trade, not simply to buy assets or repay debts. Because the rules interact with how shares are structured, keeping an accurate cap table and clean records at Companies House is important throughout.

The rules for investors

Investors must meet conditions too. In broad terms, an investor generally must:

• Buy new ordinary shares, paid up in full in cash, that carry no special protections.
• Hold the shares for at least three years to keep income tax relief and qualify for the CGT exemption.
• Not be connected with the company in certain ways (for example, employees or those with a large stake face restrictions, though founders may qualify under SEIS in limited circumstances).
• Stay within the annual limits on how much can attract relief.

The three-year holding period is central. The schemes are designed to reward patient capital, so selling early — or the company breaching the rules within that window — can lead to reliefs being withdrawn. Investors should also remember that tax relief does not remove the underlying commercial risk: early-stage companies can and do fail.

How the schemes work in practice

For a founder raising money, the process usually runs in a recognisable order:

1. Advance assurance — before the raise, the company applies to HMRC for advance assurance, an indication that the shares are likely to qualify. This gives investors confidence.
2. The raise — investors are brought in, often via a term sheet, and shares are issued.
3. Compliance — after issuing shares (and once trading conditions are met), the company submits the relevant compliance statement to HMRC.
4. Certificates — HMRC authorises the company to issue certificates (SEIS3 or EIS3) to investors.
5. Claiming relief — investors use these certificates to claim their reliefs through their tax return.

Getting the sequence and paperwork right is essential, because mistakes can cost investors their reliefs and damage trust. This is one reason careful preparation and due diligence matter on both sides of the deal. For founders, the schemes are often a cornerstone of raising investment: being SEIS or EIS ready, with advance assurance in hand, makes a company markedly more attractive to UK angel investors.

The bottom line

EIS and SEIS are UK government schemes that reward investors for backing qualifying early-stage companies, with SEIS aimed at the very earliest stage and EIS at slightly larger young firms. Investors can claim income tax relief of 50% (SEIS) or 30% (EIS), benefit from capital gains exemption on qualifying gains, and use loss relief if the company fails — a package that sharply reduces their real risk. In return, both the company and the investor must meet detailed conditions, and shares are normally held for at least three years. For founders, being scheme-ready can transform a fundraise; for everyone, the rules are intricate, so check current HMRC guidance and take professional advice.

Key takeaways

• EIS and SEIS are UK government schemes that offer income and capital gains tax reliefs to investors who back qualifying early-stage companies.
• SEIS targets very early-stage companies and offers higher income tax relief, while EIS supports slightly larger, still-young companies.
• Reliefs include income tax relief on the amount invested, capital gains tax exemption on qualifying gains, and loss relief if the company fails.
• Both the company and the investor must meet detailed conditions, and shares usually must be held for at least three years.
• Used correctly, the schemes make it far easier for startups to attract investment by reducing investors' risk.

Sources

• GOV.UK — Tax relief for investors using venture capital schemes
• GOV.UK — Apply to use the Seed Enterprise Investment Scheme
• HMRC — Use the Enterprise Investment Scheme to raise money

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