What on earth is SEIS and EIS?
A quick overview of the UK's enticing investment schemes and how you can make the most of them.
You aren’t alone if you had this question, and so we hope to provide some insight on this below.
Seed Enterprise Investment Scheme (SEIS): SEIS targets investment for early-stage companies, that have been trading for less than 2 years. It is usually very difficult to find decent SEIS investment opportunities.
Enterprise Investment Scheme (EIS): EIS supports early-stage businesses that are generally slightly more established than SEIS businesses and have been trading for less than 7 years.
Why should you care?
If you’re paying tax in the UK, SEIS/EIS offers you a way to get a substantial tax rebate by investing into early-stage companies. There are a number of rules, but in short, by investing into early-stage companies, the government will give you up to 50% of your investment back in cash. And if the company fails, they’ll give you up to another 22.5%. That means your max loss can be as low as 27.5% of your initial investment, while the upside is exponential.
Here is a practical example:
You decide to invest £2,000 into a company that Paxos VC puts forward that is eligible for SEIS.
Once your investment is made, you can apply to receive £1,000 (50% of the £2,000 investment) back from HMRC. If you’ve paid more than £1,000 in tax over the year, this is guaranteed.
If the company does well and there is a liquidity event (ie: you can sell your shares), there is no Capital Gains Tax. Let’s say you sell your shares in 5 years time for £10,000, you will get £10,000 into your bank account. No tax.
If the company fails, you will be able to claim back loss relief on net invested funds (total invested funds, less income tax relief claimed), at the highest rate of tax that you have paid. Depending on your tax bracket, this could be up to an additional £450 in tax relief (in this example).
Cool, right?
There is exponential upside potential (in this case a 5x return, or 10x return after you take the tax rebate into account) and the max you stand to lose is £550 or 27.5% of your initial £2,000 investment.
Why do these schemes exist?
SEIS and EIS were set up by the government in a bid to boost entrepreneurship in the UK, by incentivising investors with substantial tax rebates. They are designed to attract investors to early-stage UK businesses, and it seems to be working. By providing generous tax breaks to investors, the schemes make it easier for companies to attract investment - giving them a much greater chance of survival.
Not only do investors get an equity stake in a business, but they also get generous tax relief on their investment - a real win!
Quite frankly, these schemes are unbelievable and UK taxpayers would be silly to not take advantage of them. The hard part, of course, is finding good investment opportunities where there is a genuine opportunity for exponential upside. That’s what we’re trying to do. Paxos VC Syndicate primarily focuses on securing deals that are either SEIS or EIS eligible, as we believe that the added tax incentive makes the risk/return profile of these early-stage investments that much more appealing.
Please note that we have only included key information and simplified examples regarding the schemes - there are exemptions and further detail which can be found on Gov.uk and various other publications.
One of the most useful guides that we have come across is this one from Seedlegals - perfect bedtime reading!
We hope you found this useful.
Kirsten & Simon