How to Get Investors for Your Business

22 October 2019
Mark Friend
Building a Business, Digital & Tech, Raising Finance, Reducing Tax

The government has been actively trying to encourage the growth of small businesses through tax incentives for investors. So if you need cash for your business and want to attract an investor then why not look at Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).

SEIS  and EIS  schemes are designed to help small and medium sized companies to raise money by encouraging investors to purchase new shares in those companies. The financial risk and cost of investment in a qualifying SEIS/EIS company is reduced by generous income tax, capital gains tax and inheritance tax reliefs available to investors.

For example, an individual can claim back £5,000 income tax from HMRC on their £10,000 investment in SEIS qualifying company. This, in effect, reduces the cost of the investment by half. For the company seeking investment it means that it can potentially preserve more of the founder`s ownership and negotiate giving away less of the company`s equity at an early stage.

The key difference between SEIS and EIS is the type of company that can raise money through each scheme.

SEIS Tax Relief is aimed at early stage start-up companies which have been trading for less than 2 years (please note that the date the company commences trading can be different from the incorporation date). The company can cumulatively raise up to £150,000 of funding through the scheme. To qualify for SEIS the company must:

  • Be independent
  • Have gross assets not exceeding £200k on the day when the shares are issued
  • Have fewer than 25 ‘full time equivalent’ employees
  • NOT have previously received investment under EIS/VCT schemes

SEIS tax benefits for investors include:

  • 50% income tax relief on the amount invested in the company
  • Exemption from capital gains tax (CGT) on sale of the SEIS shares if held for at least 3 years
  • CGT exemption relief – SEIS reinvestment relief enables an individual who has disposed of an asset that would give rise to a chargeable gain to treat a maximum of 50% of that gain as exempt from CGT, where they have reinvested all or part of the amount of the gain in qualifying SEIS shares
  • Exemption from inheritance tax (IHT) if the shares have been held for 2 years at death
  • Loss relief if the shares are disposed of for less than the subscription price

EIS tax relief is aimed at growing companies which have been trading for less than 7 years. The company can raise up to £5m each year under EIS scheme up to a lifetime limit of £12m. To qualify for EIS the company must:

  • Be independent
  • Have gross assets not exceeding £15m before, and £16m immediately after, the share issued
  • Have fewer than 250 ‘full time equivalent’ employees
  • Use the money raised from the issue of EIS shares for Growth & Development

EIS tax benefits for investors include:

  • Income tax relief of up to 30% of the sum invested
  • Exemption from capital gains tax (CGT) on sale of shares if held for >3 years
  • CGT deferral relief – up to £1m gain realised on disposal of any assets can be frozen if re-invested in qualifying EIS shares between 12 months before and 3 years after the gain arising
  • Exemption from inheritance tax (IHT) if the shares have been held for 2 years at death
  • Loss relief if the shares are disposed of for less than the subscription price

It is also worth remembering that SEIS and EIS tax relief won’t be available for the company’s employees (however paid directors can qualify in some cases) and to investors who, together with their associates but not siblings, own more than 30% of the company`s share capital.

SEIS blog table

 

As a firm we have been involved in a number of SEIS and EIS schemes particularly in the digital and tech sector where young companies are seeking substantial investment to accelerate growth. We can assist your company with getting advance assurance from HMRC to confirm that your company will qualify for SEIS/EIS tax reliefs and can deal with all the necessary paperwork pertaining to the claims. If you need advice on EIS/SEIS please contact our tax team.

The content in this blog is correct as at 22/10/2019. See terms and conditions.

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