EIS and SEIS investing is becoming more and more popular. In this guide, we aim to help investors delve into the detail of these schemes, looking at the component parts that make them tick and illustrate how they work in practice.
This “Under the Bonnet: guide follows the path of an EIS investment, from the initial sourcing of funds from UK tax-paying investors, through the different stages of the investment’s life cycle, to the point when investments are exited. We answer common queries, including:
- How to source EIS-qualifying investments
- How to support an investee company to aid its success
- What happens once you’ve invested
- Planning a route to exit
- Questions to ask your EIS manager
There have been many changes affecting the personal investment industry over the last 20 years including a number of tax incentives to encourage wider investment provision by the individual for their own benefit. In today’s environment, tax-efficient investments are more limited, in particular, those related to pension schemes. The EIS and SEIS schemes are now the only UK tax efficient investments to offer Capital Gains Tax (“CGT”) Deferral Relief. With the changes to the maximum level of contributions to pensions, investors may wish to consider alternative investments, such as EIS, SEIS and VCTs, alongside their pensions.
The following table sets out where the EIS and SEIS sits in comparison to other tax efficient investments, by way of illustration but please bear in mind these will depend on individual circumstances and the notes refer to the relevant section for each tax relief.
UK Tax-efficient Investment Comparison Table
|Income Tax Relief||30%||Nil||Up to 45%
|Capital Gains Deferral||Nil||Nil||Nil||Up to 28% (A)|
|Capital Gains Reinvestment Relief||Nil||Nil||Nil||Effective relief up to 14% (B)|
|IHT Relief||No||No (C)||Yes (D)
||Yes after 2 years||Yes after 2 years|
|Tax Free Exit||Yes||Yes||Yes/No||Yes/No (E)||Yes after 3 years|
|Tax Free Dividends||Yes (F)||Yes||N/A||No (F)
|Limits||£200,000||£20,000||£40,000 (carry forward may also be available) (G)||£1M (H)||£200,000 (I)|
|Min Holding Period||5 years||None||To age 55+||2 years for IHT
3 years for EIS
|2 years for IHT
3 years for SEIS
(A) Gains arising before 6 April 2021 to higher rate UK tax payers are chargeable at 28%. From 6 April 2021 the rate is generally 20% (but remains at 28% for certain assets.) The relief is a deferral only, and not an exemption and the deferred gain will crystallise on sale of the EIS shares.
(B) SEIS reinvestment relief exempts half of the gain reinvested up to the SEIS maximum investment of £100k ie for a gain of £100k reinvested in an SEIS investment, £50k of the reinvested gain is exempt.
(C) Some shares in AIM listed companies held in an ISA and held for at least two years may be eligible for IHT relief. All shares held in an ISA are exempt from CGT.
(D) In certain circumstances. Specific IHT advice is required
(E) There is no tax free exit for shares for which EIS deferral relief only was claimed.
(F) With effect from 6 April 2016 the 10% tax credit on dividends has been abolished and replaced with an annual dividend allowance (the dividend nil rate (‘DNR)). The DNR charges income tax at 0% on the first £2,000 of an individual’s dividend income which would be chargeable to tax but for the DNR. Chargeable dividend income above the DNR is chargeable to tax at basic, upper or higher rate dependent upon the tax rate which applies to the individual shareholder.
(G) Relief for pension contributions is complex and separate advice should be taken.
- In 2020/2021 those with annual income (including pension) over £200,000 will have their annual allowance reduced by £1 to a minimum of £10,000 for every £2 over £200,000 for individuals with annual income excluding pension below £200,000 there will be no reduction
- Within the Annual Allowance, member contributions benefit from tax relief at the individual’s marginal rate of tax, i.e. up to 45%
- Within the Annual Allowance, relievable member contributions are limited to 100% of employment earnings.
- The reduction in the Annual Allowance is, however, accompanied by a “Carry Forward” facility, allowing pension scheme members (if a member of a pension scheme at some time during the earlier tax years) to Carry Forward the difference between £40k from thye previous 3 tax years and the lesser level of total contributions made in the previous three tax years.
(H) Up to £1M of EIS investment may be carried back to the previous tax year if the limit for that year was not fully utilised.
(I) Up to £200k of SEIS investment may be carried back to the previous tax year if the limit for the year was not fully utilised.