View the related Tax Guidance about Enterprise Investment Scheme (EIS)
SEIS and EIS ― overview
SEIS and EIS ― overviewThe seed enterprise investment scheme (SEIS) and enterprise investment scheme (EIS) are very similar schemes which offer substantial tax incentives to investors in companies which qualify. The tax incentives for SEIS and EIS investments are intended to encourage investment in high-risk, small, unquoted companies that may find it difficult to raise finance without the tax incentives being offered.There are stringent conditions imposed upon companies wishing to qualify for the scheme. Tax advice on the schemes should be undertaken and supervised by a suitably experienced practitioner. Terms of engagement for SEIS and EIS work should be carefully drafted in particular because conditions are tested on an ongoing basis. Therefore, tax advisers should ensure that they limit their liability in respect of any future action taken by the company which could affect qualification for the schemes.There are no particular tax reliefs available to the company. The tax reliefs are intended for the investor to incentivise investment in a high-risk, early stage company. The availability of tax relief, together with a solid business plan, is a strong draw for investors. Many investors are sophisticated serial investors.See also the Gains and Losses on EIS and SEIS shares video for useful summaries of the regimes.Raising finance through SEIS and EISSEIS focuses investment in the very early stage, new businesses that may face particular difficulties in raising finance as they are seen as being very high-risk. EIS is also intended for small companies but they can be a little larger and
Gain deferred through EIS becomes chargeable
Gain deferred through EIS becomes chargeableThe enterprise investment scheme (EIS) encourages individuals to invest money in shares issued by qualifying unquoted companies.A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. For a summary of the tax reliefs that are available to the investor, see the Enterprise investment scheme tax relief guidance note.Any profit on the disposal of the EIS shares themselves is likely to be exempt from capital gains tax under the rules discussed in the Enterprise investment scheme tax relief guidance note.CGT deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares. This is discussed in detail in the Enterprise investment scheme deferral relief guidance note. Under EIS deferral relief (also known as EIS re-investment relief), deferred gains are set aside or ‘frozen’ until the occurrence of specified future events. The base cost of the replacement asset (ie the new EIS shares) remains unchanged. This frozen gain crystallises and becomes chargeable in the year of a ‘chargeable event’. Usually, this will be on the sale of the EIS shares. When the EIS shares are sold, there will sometimes be a gain on the shares themselves but, in addition, this disposal will also crystallise the frozen gain.This guidance note discusses the triggers which cause the capital gain deferred on the subscription for EIS shares to crystallise.Chargeable eventsThe following are chargeable events:•gift of the EIS shares, unless the gift is to the individual’s spouse
Deferral of capital gains via reinvestment
Deferral of capital gains via reinvestmentWhy defer a gain?An individual’s net taxable income and chargeable gains for the tax year influence the rate of tax payable on their capital gains. See the Introduction to capital gains tax guidance note.Depending on the nature of the asset that is subject to disposal, this can result in the individual paying capital gains tax (CGT) at 20% or 28% (reduced to 24% from 6 April 2024 onwards) in tax years where their taxable income and gains exceed the basic rate band, but only 10% or 18% on gains in years where their net income and gains are lower than that band. If a gain is covered by the annual exemption, no CGT is due. See the Introduction to capital gains tax guidance note.The basic rate band is £37,700 for the 2023/24 and 2024/25 tax years, but this may be extended by personal pension contributions or donations to charity via gift aid. See the Proforma income tax calculation guidance note.The annual exemption is £6,000 for 2023/24 and £3,000 for 2024/25. To optimise their CGT position, a taxpayer can reinvest the proceeds from the sale of an asset into the purchase of a qualifying asset and elect for the gain to be rolled into those replacement assets.When the replacement asset is subject to disposal, or possibly where the investment conditions are broken, the deferred gain falls back into charge to CGT. This may be some years after the original gain arose and in many cases,
Seed enterprise investment scheme ― withdrawal of relief
Seed enterprise investment scheme ― withdrawal of reliefThe seed enterprise investment scheme (SEIS), like the enterprise investment scheme (EIS), is designed to encourage individuals to invest money in shares issued by qualifying unquoted companies trading wholly or mainly in the UK.HMRC has published some basic guidance. See the Seed enterprise investment scheme (SEIS) ― introduction guidance note for an overview of the scheme and for details on how to make a claim for relief.Circumstances under which SEIS relief may be withdrawn or reducedThere are a plethora of conditions that must be met in order for SEIS relief to be given and several conditions apply over periods of time (see the Seed enterprise investment scheme ― scheme criteria guidance note). It is possible for conditions to be breached after relief has been claimed by the investor. Because of this, there are extensive provisions for the withdrawal of relief. Withdrawal applies to all forms of relief given through SEIS and must be applied as if the relief had never been given.SEIS relief is withdrawn if:•the shares are sold to someone other than the spouse / civil partner•a call option is granted in respect of the shares•the investor acquires a put option in respect of the shares•the investor or their associate receives 'value' from the company, or a person connected with the company•the company carries on a trade that was previously carried on in the period by someone other than the company or a qualifying subsidiary•the
Utilising capital losses
Utilising capital lossesWhy capital losses are importantCapital losses are usually set against the capital gains that arise in the same year as the loss, reducing the total taxable gains for that year. Losses not used in this fashion are normally carried forward to be set against the next available gains.However, in certain circumstances, those losses may be blocked, restricted, carried back to earlier tax years or possibly treated as if they were income tax losses (see below).Where the taxpayer is subject to more than one rate of capital gains tax in a single tax year, they can choose which gains should be reduced by their capital losses so that their tax liability is reduced to the minimum possible.If a taxpayer makes a claim to defer chargeable gains for an earlier year, the use of losses may be disturbed, which can have a knock-on effect for several tax years.Capital losses must be quantified and claimed before they can be used. See the Use of capital losses guidance note for how capital losses arise and how to claim them.Identify special lossesWhere the taxpayer has made a capital loss, you first need to determine if the loss arises under one of the special circumstances that limit or expand the use of that loss, see below.EIS, SEIS or SITR investmentsEnterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) are designed to encourage investment by individuals in unquoted trading companies. The social investment tax relief scheme (SITR, also known as SI tax relief)
Timing of disposal for capital gains tax
Timing of disposal for capital gains taxDate of disposalThe date of the disposal determines the period in which the gain is subject to capital gains tax (CGT). When the rates of CGT change, the determination of the date of disposal can also affect the rate of CGT that applies to the gain.Given the Chancellor’s announcement of the reduction of the residential property gains higher rate from 28% to 24% with effect from 6 April 2024, it may be desirable for taxpayers who were due to exchange contracts on the disposal of residential property before 6 April 2024 to delay this until 6 April 2024 or later (providing the buyer agrees). This will be relevant where a taxable gain arises, eg on a let property, that would be taxable at higher rates. See ‘Under contract’ below. For the rates of CGT, see the Introduction to capital gains tax guidance note.The rules for determining the date of disposal vary according to the type of disposal made.Type of disposalUnder contractWhere an asset is disposed of and acquired under a contract, the time of the disposal and acquisition is the time when that contract is made, ie the date contracts are exchanged. It is not the date of the completion of the contract, or time of the conveyance or transfer of the asset (if different). However, if the contract is never completed, the disposal never takes place. In the case of a conditional contract, the time of disposal and acquisition is the time
Conditions to be met by the EIS investor
Conditions to be met by the EIS investorTax reliefs under the enterprise investment scheme (EIS) can be summarised as follows:•income tax relief for the investor of up to 30% of the amount invested•disposals of EIS shares after three years may be free from CGT•capital gains deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares•losses on EIS shares may be offset against taxable income•EIS investments should qualify for IHT business property relief after two years’ ownershipEIS reliefs are available to individuals only, except for EIS deferral relief which is also available to trustees. EIS reliefs are available to UK residents. UK non-residents only qualify for some EIS reliefs; they are not eligible for deferral relief or relief for on losses on disposals of EIS shares. With the exception of EIS deferral relief, EIS reliefs are available only to outside investors.For more detail on the tax reliefs, see the Enterprise investment scheme tax relief and Enterprise investment scheme deferral relief guidance notes.Note that a sunset clause for EIS income tax relief has been introduced. This ensures that income tax relief will no longer be given to subscriptions made on or after 6 April 2025, unless the legislation is renewed by Treasury Order. The sunset date is extended to 6 April 2035 by FA 2024, but the Treasury Order cannot be brought before Parliament until domestic and international subsidy approval has been received. Ongoing qualifying conditionsTo obtain (and retain) EIS tax
How to calculate the clawback of EIS income tax relief
How to calculate the clawback of EIS income tax reliefThe enterprise investment scheme (EIS) encourages individuals to invest money in shares issued by qualifying unquoted companies.A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. They can benefit from the following tax reliefs:•income tax relief for the investor of up to 30% of the amount invested and disposals of EIS shares after three years may be free from CGT (see the Enterprise investment scheme tax relief guidance note)•capital gains deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares (see the Enterprise investment scheme deferral relief guidance note)•losses on EIS shares may be offset against taxable income (see the Losses on shares set against income guidance note)•EIS investments should qualify for IHT business property relief after two years’ ownership (see the BPR guidance note)This guidance note discusses the calculation of the amount of income tax relief that might be withdrawn or reduced in certain situations.IntroductionBroadly, income tax relief is withdrawn if, within three years of subscription (or three years from the commencement of the trade, if later):•the shares are gifted or sold to someone other than the spouse / civil partner•the investor is granted an option binding the grantor to buy the shares or the investor grants an option which on exercise obliges them to sell the shares•the investor or their ‘associate’ receives ‘value’ from the company, or
Venture capital scheme shares
Venture capital scheme sharesVenture capital schemes are tax efficient investments sanctioned by the Government in order to encourage investment in UK enterprises. They comprise the following schemes:•enterprise investment scheme (EIS)•seed enterprise investment scheme (SEIS)•venture capital trusts (VCT)•social investment relief (SI relief, also known as social investment tax relief (SITR))The tax reliefs are similar but not identical. Some investors consider VCTs to be more attractive as the risks are spread by indirectly investing in a number of unquoted companies rather than investing direct in one company, as with EIS and SEIS investments.This guidance note considers the capital gains tax position of individuals disposing of shares acquired through the schemes listed above.Enterprise investment schemeEIS is the name of a scheme which encourages individuals to invest money in shares issued by qualifying unquoted trading companies with a permanent establishment in the UK.A subscription for eligible shares in a qualifying EIS company is a tax efficient investment for the individual. The individual can benefit from the following tax reliefs:•income tax relief of 30% on the amount invested•any capital loss on the EIS shares is an allowable loss for capital gains tax (CGT) but gains are exempt (if certain conditions are met)•the investment can be used to defer the gain on the sale of any assetThese reliefs are considered in further detail in the Enterprise investment scheme tax relief and Enterprise investment scheme deferral relief guidance notes. The conditions for a valid investment are discussed in the
Enterprise investment scheme ― introduction
Enterprise investment scheme ― introductionThe enterprise investment scheme (EIS) offers substantial tax incentives to investors in companies which qualify.In summary, tax reliefs under EIS are as follows:•income tax relief for the investor of up to 30% of the amount invested•disposals of EIS shares after three years may be free from capital gains tax•capital gains tax deferral relief allows investors disposing of any asset to defer gains against subscriptions in EIS shares•losses on EIS shares may be offset against taxable income•EIS investments should qualify for IHT business property relief after two years’ ownershipCommercial and tax risk to consider when advising on EISThe tax incentives for EIS investments are intended to encourage investment in high-risk companies. Therefore, there are stringent conditions associated with EIS reliefs and tax advice on EIS should be undertaken and supervised by a suitable experienced practitioner.Terms of engagement for EIS work should be carefully drafted, in particular because conditions are tested on an on-going basis and tax advisers should ensure that they are not liable for the results of any future action, which will be out of their control, that affects qualification for EIS.An important part of the process is to advise the investor of the risks involved with investments under the EIS from a tax perspective. The main thing to make the investor aware of is the potential for relief to be withdrawn or restricted because of actions by the investee company. This may happen regardless of the fact that all
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