Exiting a business is a milestone worth celebrating, but it also brings important decisions about how to protect and grow your wealth. For business owners who have recently sold their company and investors managing a significant tax liability, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are some of the UK's most powerful tools for preserving and growing capital.
These schemes allow you to directly address your immediate Capital Gains Tax (CGT) burden through deferral or reinvestment relief, while also offering a suite of additional tax benefits for your new investments. This includes upfront income tax relief of up to 50%, the potential for completely tax-free growth, and downside protection through loss relief, all in exchange for backing the next generation of UK start-ups.
With the recent extension of the schemes to 2035, we explore how they can play a key role in your tax planning toolkit.
The immediate benefits of EIS and SEIS for tax management
For anyone who has recently realised a significant capital gain, the immediate priority is managing the tax liability. This is where EIS and SEIS offer valuable flexibility.
- EIS Capital Gains Tax deferral relief: You can defer the payment of tax on a capital gain from the sale of any asset, including your business, by reinvesting that gain into shares of an EIS-qualifying company. The investment must be made within a window of one year before or three years after the gain arose. The deferred tax only becomes payable when you sell the new EIS shares, offering significant long-term planning benefits.
- SEIS CGT reinvestment relief: SEIS goes one step further. If you reinvest a gain into SEIS-qualifying shares, you can receive an exemption on 50% of the reinvested gain. This doesn't just defer the tax; it eliminates it on half of the gain, making it an exceptionally powerful option.
What other tax benefits do EIS and SEIS offer?
While the CGT benefits are an immediate draw, the schemes offer a comprehensive set of reliefs that work together to maximise returns and minimise risk.
Upfront Income Tax Relief
Both schemes offer a significant reduction in your income tax liability for the year you invest.
- SEIS: 50% income tax relief on investments up to £200,000 per year.
- EIS: 30% income tax relief on investments up to £1 million per year (£2m for Knowledge-Intensive Companies).
You can also "carry back" this relief to the previous tax year, potentially generating a tax rebate.
- Tax-free growth: Any gains made on your SEIS or EIS investments are entirely exempt from Capital Gains Tax, provided you have held the shares for at least three years and claimed the initial income tax relief. This is a major advantage over standard investments where your profits would be taxed.
- Loss relief: Investing in start-ups is inherently risky; some will fail. Loss relief provides a vital cushion. If you make a loss on an SEIS/EIS investment, you can offset that loss (minus any income tax relief you received) against either your income tax or future capital gains. For a 45% additional-rate taxpayer, this can reduce the effective loss on a failed investment to as little as 15.5p in the pound after all reliefs are accounted for.
- Inheritance Tax relief: After holding the shares for just two years, SEIS and EIS investments can qualify for 100% Business Property Relief (BPR). This means they fall outside of your estate for Inheritance Tax purposes, making them a highly effective tool for succession planning.
Key rules for investors
To benefit from these reliefs, you, as the investor, must adhere to certain rules:
- Holding period: You must hold the shares for at least three years to retain the income tax and CGT exemption reliefs.
- Connection to the company: You generally cannot be an employee of the company you are investing in. While you can be a paid director under SEIS, the rules for EIS are stricter, typically only allowing unpaid directors to receive tax relief.
- Substantial interest: You cannot hold more than 30% of the company's shares or voting rights.
- Genuine Risk: The investment must be for genuine commercial purposes and pose a risk to your capital; it cannot be part of a tax avoidance arrangement.
Planning your tax relief strategy
For founders looking to make smart, tax-efficient investments, SEIS and EIS offer a handy combination of broad tax reliefs and income protection.
Navigating the rules and identifying the right opportunities requires careful, expert advice. At Haines Watts, we specialise in guiding businesses through the complexity of tax to help you make the most of your assets, including:
- Structuring your exit to maximise tax efficiency and calculating the precise Capital Gains Tax liability you need to manage.
- Planning your liabilities to help you choose the best strategy to fit your future plans.
- Advising on the long-term Inheritance Tax benefits of holding these assets as part of your estate and succession planning.
- Ensuring all HMRC compliance requirements for the schemes are met, protecting you from a future withdrawal of tax relief.
- Providing strategic advice on how to structure your wealth and future income in the most tax-efficient way following your business sale.
To explore how you can make tax-efficient use of your assets, contact us today.
