EIS vs SEIS - What is the difference?
Are you an investor looking for a tax-efficient investment opportunity? If so, you would’ve already heard about tax-efficient investing via the EIS or SEIS scheme - but what is the difference?
In the world of finance, both the EIS and SEIS schemes are government-led schemes designed to help investors to provide capital to UK start ups, with the aim of stimulating the economy whilst providing a tax-efficient way for high-net-worth individuals to invest. According to EMV Capital, the scheme "can provide target returns ranging from around 1.3 times to over 10 times the money invested. But each scheme is slightly different to the other and will be suitable for a different type of investor.
In this article, we discuss the key differences between the EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) in the UK.
SEIS is aimed at start-ups whilst EIS is for well-established companies
This is the key difference between the two. To raise capital via the EIS investment scheme, the company should be to be less than three years old (changed in April 2023) and meet certain other criteria, such as having fewer than 25 employees.
On the other hand, to qualify for EIS investment, a company should be trading for less than 7 years, be based in the UK and have fewer than 250 employees. The company should also be listed on a recognised stock exchange.
EIS investment is typically aimed at more established companies than the SEIS, and the company must be carrying out a qualifying trade.
Tax benefit differences
Both schemes offer tax benefits to investors, which is why the scheme is so attractive. However, the tax relief differences are slightly different:
Income Tax Relief:
- The SEIS scheme offers a higher rate of income tax relief than EIS. Investors can claim back up to 50% of their investment through income tax relief with SEIS, while EIS offers 30% income tax relief.
Capital Gains Tax Relief:
- Both EIS and SEIS offer Capital Gains Tax (CGT) relief. SEIS investors can claim 50% CGT relief on any gains they make from their investment, provided they hold the shares for at least three years. With EIS, investors are exempt from CGT on any gains made from their investment, provided they hold the shares for at least three years.
- SEIS investors can claim loss relief of up to 50% of their investment if the company fails, while EIS investors can claim loss relief of up to 30%.
Inheritance Tax Relief:
- Both EIS and SEIS also offer Inheritance Tax (IHT) relief. If an investor holds shares in a company for at least two years, those shares will usually qualify for IHT relief at 100%.
Maximum funding differences
The maximum amount of funding that can be raised through each scheme respectively is very different.
- SEIS: Companies are able to raise a maximum of £350,000 investment through the SEIS. This has recently increased from £150,000 in the mini-budget on November 2022. This means that a company can issue up to £350,000 worth of shares to investors through the SEIS scheme.
- EIS: The maximum amount of funding that can be raised through EIS is £5 million per year. This means that a company can issue up to £5 million worth of shares to investors through the EIS scheme in any given tax year.
Remember that both the EIS and SEIS schemes have rules around how the funding can be used. For example, the funds must be used to grow the business, and not for activities such as buying back shares or paying off debts. In addition, companies must meet certain criteria to be eligible for funding through the schemes.
Typical Funding Criteria Summary
|Fewer than 25 employees||Fewer than 250 employees|
|Trading for less than 3 years||Trading for less than 7 years|
|Gross assets - no more than £350,000||Gross assets no more than £15m|
|£250,000 funding limit||£5m per year - £20m funding limit for knowledge-intensive companies.|
|50% initial income tax relief||30% initial income tax relief|
Why is there a difference?
The difference in eligibility criteria between the SEIS and EIS investment schemes is based on their respective objectives and the types of companies they aim to support.
The SEIS is designed to encourage investment in early-stage startups that may have a limited trading history and may find it difficult to secure funding from traditional sources. By offering more generous tax incentives to investors and requiring companies to meet certain criteria such as being less than three years old and having limited assets, the scheme aims to stimulate investment in these high-risk but potentially high-reward ventures.
In contrast, the EIS is designed to encourage investment in more established SMEs that have a proven track record and are looking to grow. The scheme offers tax incentives to investors and is intended to support the growth of these SMEs by providing access to funding that might otherwise be difficult to secure.
So, the difference in eligibility criteria between the SEIS and EIS schemes reflects their different objectives and the types of companies they aim to support as well as the type of investor.
Which is right for me?
To sum up, while both the EIS and SEIS are designed to encourage investment in SMEs, they differ in their eligibility criteria, tax benefits, and maximum funding amounts. If you're a startup looking for investment, SEIS might be the better option for you. However, for more established SMEs, the EIS might be a more suitable choice.
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