10 Aug | EIS or SEIS: What’s Right For You?
by Charles Owen, Founder & Director, CoInvestor
In the post-Brexit investment climate of volatile equity markets and, as looks likely, even lower interest rates, smaller companies look set to emerge as an increasingly attractive proposition. In addition to these factors, the UK government continues to offer tax breaks to encourage private investment in smaller firms. Two initiatives in particular – the Enterprise Investment Scheme (EIS) and the more recent Seed Enterprise Investment Scheme (SEIS) – are worth a closer look.
While EIS and SEIS are broadly similar in terms of tax relief counted against investment, being favourable income tax breaks and the ability to offset investment losses, there are certain key differences which investors need to weigh up. Outlined below are a few of the variables to consider when deciding between EIS and SEIS.
Broadly speaking, SEIS should offer greater potential returns from investment when considering the relative uncertainty of investing in smaller, younger companies. EIS, on the other hand, applies to slightly later stage “small unlisted companies”. These are defined as companies which aren’t quoted on a major stock exchange like the London Stock Exchange, have a maximum of £15m in gross assets and employ fewer than 250 staff. It is worth noting that companies listed on AiM and ISDX can be EIS qualifying. SEIS-qualifying companies are more restricted, with a maximum of 50 employees and £200k in gross assets. Additionally, SEIS companies must be under two years old.
Both systems offer income tax relief, although SEIS (50%) offers more than EIS (30%). Profits from either EIS or SEIS investments are not subject to capital gains tax, and any losses incurred can be offset against income tax (taking into account the income tax relief). Additionally, there is no inheritance tax to pay on shares purchased as part of an EIS.
SEIS – Risk vs. Reward
The principal difference between EIS and SEIS is likely to be the age and maturity of the qualifying company. SEIS is frequently the very first external round of finance and as such the company is likely to be in an earlier, higher growth stage of development, with smaller operating assets and shorter track records. By definition therefore, while SEIS offers potentially greater rewards than EIS qualifying investments, this can come with considerably greater risk.
With those risks, however, come increased benefits. As well as the more generous income tax relief, there is an additional advantage called Capital Gains Reinvestment Relief, through which up to 50% of recently paid capital gains tax on another investment can be reclaimed provided the money is reinvested into SEIS. This benefit is an example of how SEIS can supplement and support your wider investment activity, and is one of the reasons why it has become a popular addition to traditional portfolios.
Both EIS and SEIS have significant appeal – and especially in today’s low-interest, low-returns environment. Smaller companies offer larger, if riskier, potential returns, and both EIS and SEIS are structures which enable investors to access those opportunities. For more experienced investors with a keen eye for detail, SEIS offers strong returns and can complement a wider portfolio. For those just beginning in alternative investments, however, more mature businesses which nevertheless can still qualify under EIS might offer more suitable options.
Find out more at www.coinvestor.co.uk.