Can I Invest in (S)EIS Funds?

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Since its conception, (S)EIS has raised a whopping £15.9bn for startups. It has help fund some of the UK's most exciting start-ups and enables thousands of early starters to kickstart their business. A lot of individuals who sit in the higher income tax bracket may wish to invest via the SEIS or EIS schemes but simply do not have the time and network to be able to do so. As an alternative, investors can invest directly into SEIS and EIS Funds, that will manage their money and make them SEIS and EIS eligible. Interested in finding out more about RLC Ventures SEIS and EIS Funds? Click Here for more info.

If you're unsure even where to start... read our piece explaining what an EIS Fund is here.

In order to be (S)EIS eligible as an investor, the government has released a list of criteria that you must meet in order to be eligible to invest.

Curious to know whether or not you are eligible to invest in an (S)EIS Funds?

(S)EIS rules for investors

In order to qualify for Income Tax relief, you cannot be ‘connected’ to the investee company by significant financial interest or employment. These conditions must be true for the duration of a period starting two years prior to the EIS share issue and lasting until three years after the investment is made.

You are recognised as being connected to the company if you are a paid company employee, partner or director. The exception is if you are an unpaid director of the company, in which case you may still claim Income Tax relief.

You are also connected to the company and therefore ineligible to receive Income Tax relief if you have a 30% or greater interest in the company or any subsidiary (this includes share capital, voting rights and the rights to assets).

No partner or associate of the investor may have other interests in the company.

Investor rules: SEIS

To view a full manual of the governments guidelines for SEIS eligibility please click here

Have UK income (but live abroad)

You don’t need to be a UK resident to claim SEIS, but you must have UK income tax liability against which to set the relief. The shares must be held for a period of at least three years from the date of issue for the relief to be retained. If they are disposed of within that three year period, or if any of the qualifying conditions cease to be met before the termination date for the shares (3 years from the date of the share issue), relief may be withdrawn or reduced.

No Employment

The investor and any ‘associates’ must not be an employee of the company as from the date of issue of the shares and up to the third anniversary of the date of the share issue. However, you can be a director, and receive reasonable compensation for this position.

Full details in this HMRC article.

No substantial interest in the company

The investor must have no ‘substantial interest’ in the issuing company at any time from incorporation of the company until the third anniversary of the date of the share issue (or for EIS two years before the date on which the shares are issued if that is later). For SEIS ‘Substantial interest’ is defined as the investor directly or indirectly possessing, or having an entitlement to acquire more than 30% stake in the company. Shareholdings of associates are taken into account in arriving at the 30% figure. For EIS this value is also 30 %.

No linked loans

No loans should be made to the investor or their associates which are linked to their subscription for shares at any time from the incorporation of the company until the third anniversary of the date of the share issue. This includes cases where credit is given or a debt due from the investor or associate is assigned.

No tax avoidance

An investor in a company is not eligible for SEIS relief unless the subscription is made for genuine commercial reasons and not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.

Limit on relief

An individual investor is limited to investing £100,000 per year for SEIS in exchange for a 50% tax break. The investor will also benefit from a capital gains tax exemption on any profits that arise from the sale of shares after three years.

Withdrawal or reduction of the relief

Tax relief under SEIS may be either withdrawn or reduced if:

  1. at any time during the three years from the date of issue of the shares, the investor disposes any of the shares;
  2. the investor receives ‘value’ from the company or from a person connected with that company at any time from the incorporation of the company to the third anniversary of the date of the share issue. The circumstances during which an investor is deemed to have received value from the company include situations where the company repays, redeems or repurchases any of its share capital belonging to the individual, the company repays a debt owed to the individual, the company provides a benefit or facility for the individual, etc. If you are unsure about whether you have received ‘value’ from the company, you can consult with the clarifications made by HMRC.
  3. there is a put option or call option over the shares at any time before the third anniversary from the date of the issue of the shares.

Finally, it is important to note that apart from the above requirements relating to the investor, an investor will not be able to claim his or her SEIS tax relief if the company ceases to meet the qualifying conditions and/or fails to spend the money raised by the share issue as required.

Investor rules: EIS

Residency:

To be able to benefit from income tax relief under EIS, the investor must be an individual who need not be a UK resident but must have UK income tax liability against which to set the relief. The individual must make the subscription on his or her own behalf, and may use another person as a nominee to subscribe for the shares or invest under a joint subscription.

No connection with the company

The investor must not be connected with the company as from the time of the incorporation of the company, or two years before the date on which the shares are issued if that is later, to the third anniversary of the date of the issue of the shares, or the third anniversary of the date on which the company begins to carry on a qualifying business activity if it has not begun to carry on that trade on the date of issue of the shares. An individual is deemed as having a ‘connection’ with the issuing company if he or she, or any associate of them, is:

– An employee, or

– A partner, or an employee of a partner, or

– A director. This restriction is tightly drawn by the legislation, so if you or an associate of yours has been a director of the company you should check with HMRC’s guidelines.

– A director of a company which is a partner of the company, or of any company which is at any time as from the incorporation of the company, or two years before the date on which the shares are issued if that is later, is a subsidiary of that company.

If you are unsure about the above, visit the extensive explanation provided by HMRC.

An individual is connected with a company if he or she, whether alone or together with any associate (i.e. spouse, civil partner, parent, child, not including brothers and sisters), directly or indirectly possesses or is entitled to acquire more than 30% of the ordinary share capital of the company or any subsidiary.

No receipt of a loan

The investor or any associate must not have received a loan by the company which would not have been made, or would not have been made on the same terms, were it not for the EIS investment, as from the incorporation of the company, or two years before the date on which the shares are issued if that is later, up to the third anniversary of the date of the issue of the shares, or if the money raised by the company was for the purpose of a trade and the company has not begun to carry on that trade on the date of issue of the shares, the third anniversary of the date on which the company begins to carry on the trade in question.

No tax avoidance

An investor in a company is not eligible for EIS relief unless the subscription is made for genuine commercial reasons and not as part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax.

Limit on relief

There is a limit on the amount on which relief can be obtained for any year of the assignment. The maximum amount for 2018-19 onwards is £1 million, or £2 million so long as any amount over £1 million is invested in one or more knowledge-intensive companies.

Withdrawal or reduction of EIS relief

In general, there may be a complete withdrawal of any relief attributable to shares if, by reason of some event, any of the condition for the EIS relief ceases to be satisfied. Such situations include (i) where the shares issued by the company are not eligible shares, (ii) the individual is not a qualifying individual, (iii) the company is not a qualifying company, (iv) the company has failed to comply with the time limits for employing the money raised by the issue.

Economic impact of (S)EIS

This measure is not expected to have any significant macroeconomic impacts.

The costing accounts for behavioural responses to the changes, whereby a proportion of capital preservation investment excluded is reinvested elsewhere through these schemes and the new incentives to invest in knowledge-intensive companies result in increased investment in those. There has not been direct ability to understand the overall impact, but the transfer of wealth from higher paying tax payers to those creating jobs is poised to be net positive.

Impact on individuals, households and families

Increasing the annual investment limit to £2 million means that some individuals will be able to claim higher amounts of tax relief if they invest in one or more knowledge-intensive companies. It is estimated that approximately 4,000 individual investors are likely to benefit from this measure annually.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

The measure may influence individuals to invest more in knowledge-intensive companies. They may benefit from the measure. More companies will benefit as a result of the change, which will lead to more founders raising money.

Impact on business including civil society organisations

The measure is expected to attract more investment in smaller innovative companies carrying out research and development and other activities to develop intellectual property that the company will use for its future trading activities. The measure is expected to have a negligible impact on businesses administration burdens. One-off costs include familiarisation with the application of the extended definition of a knowledge-intensive company.

There is no impact on civil society organisations

*Capital at Risk*

Disclaimer

The information on this page does not constitute financial advice and is provided on an information basis only, based on research using the following sources: