Venture capital schemes, which include the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), have similar tax structures and reliefs and provide tax-efficient investment into budding businesses.
There are various ways in which investors can use EIS and SEIS, and your choices will depend on factors such as risk tolerance and the amount that you are looking to invest.
High-net-worth individuals who want to test the waters of venture capital investing may prefer to use a fund that specialises in these types of investments rather than risk a large amount of money on a single project.
The EIS was the first venture capital scheme. It followed the Business Expansion Scheme in 1994, with the purpose of encouraging investment into young businesses not yet listed on the stock exchange.
Over the years, the scheme evolved several times, but its primary goal has stayed the same. It is successful in attracting a continuous flow of investment to the companies that need it most. In October last year, the total amount ever raised by EISs stood at a whopping £16.2 billion.
An EIS offers investors the opportunity to support unlisted enterprises, which as a rule have higher risks due to the lack of liquidity often experienced at this stage of business development. However, significant tax reliefs such as a 30% headline tax relief on the amount of an investment counteract these risks.
Exemption from tax on achieved growth and deferred capital gains tax on invested gains are also beneficial. EIS shares also qualify for loss relief on the net amount invested should there be no positive returns. This can reduce the effective exposure to only 38.5%.
The SEIS debuted six years ago to help the newest enterprises seeking investment. This scheme offers support for the initial £150,000 of external equity capital that a business can raise within two years after starting to trade. By October last year, SEIS had already aided 6,665 British companies in raising more than £621 million of investment by offering appealing incentives to attract investors.
While a SEIS investment historically holds the highest amount of risk, now that Royal Assent to the Finance Bill has passed in March, it could be time to reconsider the SEIS . The scheme comes with more tax reliefs than EIS, including 50% upfront income tax relief as well as reinvestment relief that enables investors to claim back half of the gains that they reinvested. Combined with loss relief and exemption on capital gains on disposal, this could reduce an investor’s effective total exposure to a mere 13.5%.
Still not sure which venture is right for you?
Whether you are a first time or frequent investor, we are happy to help you navigate which scheme will benefit you. Download our Tax Efficient Guide or alternatively if you wish to learn more about our investment opportunities or anything else, please contact Martin Sherwood on 020 7843 0472 or firstname.lastname@example.org