Unravelling the complexities of EIS, SEIS, and VCTs, their eligibility criteria and tax benefits for investors, is critical to making more informed investment decisions in the patient capital early-stage investing sector.
Investing in startups and early-stage companies can offer lucrative opportunities for investors, but comes with its fair share of risks. To mitigate these risks and incentivise investment in promising ventures, governments around the world have introduced various investment schemes. In the UK, three prominent schemes are the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCTs). In this blog post, I will delve into a comparative analysis of these schemes, highlighting their differences in eligibility criteria, tax benefits, and investment focus.
Comparing company eligibility criteria
There are some key requirements for a company to be eligible for investment in any of these three structures. Below we discuss the main eligibility criteria.
In order for a company to qualify for EIS investment it must:
- be unquoted and have gross assets of £15 million or less before the investment and not more than £16 million immediately after investment.
- have fewer than 250 full-time equivalent employees.
- be a "qualifying trade" as defined by HMRC (and outlined in the VCM manual), and cannot be involved in certain excluded activities like dealing in land, financial services, or legal services.
For a company to qualify for SEIS investment it must be:
- gross assets must be £350,000 or less, and fewer than 25 full-time equivalent employees.
- trading less than three years and must not have received investment under any other venture capital scheme.
VCTs are investment vehicles listed on the London Stock Exchange. VCTs hold at least 70% of their funds in qualifying unquoted companies or AIM-listed companies. In order for a company to become part of a VCT portfolio it must:
- qualify as eligible for VCT investment, i.e., meet the eligible trade qualifications per HMRC's Venture Capital Schemes manual.
- The money raised should be used for the growth and development of the investee companies.
Comparing tax benefits for investors
One of the key factors that differentiate EIS, SEIS, and VCTs is the tax benefits they offer to investors.
EIS offers income tax relief of up to 30% of the amount invested, for up to £1 million per tax year (this can extend to £2 million if invested in Knowledge-Intensive Companies). It also offers capital gains tax deferral on gains reinvested in EIS-eligible companies, exemption from capital gains tax on any profits made from the sale of EIS shares after three years, and loss relief in the event of failure.
SEIS is even more generous as it offers income tax relief of up to 50% of the amount invested, but is capped at £200,000 of investment per tax year. Like EIS, SEIS offers capital gains tax exemption on any profits made from the sale of SEIS shares, and loss relief in the event of failure. SEIS also offers reinvestment relief which allows an individual who has disposed of an asset at a gain, 50% of the gain to exempt up to 50% of the gain from Capital Gains Tax by reinvesting in qualifying SEIS shares.
VCTs offer income tax relief of up to 30% of the amount invested capped at £200,000 of investment per tax year, but with the added benefit of tax-free dividends. VCTs also offer exemption from capital gains tax on any profits made from the sale of VCT shares.
Comparing the tax benefits of EIS, SEIS, and VCTs can help investors determine which investment scheme aligns best with their financial goals and objectives.
Comparing investment themes and strategies
While EIS, SEIS, and VCTs all offer tax benefits, they differ in their investment focus.
EIS primarily focuses on supporting early-stage companies with high growth potential. It aims to encourage investment in innovative and risky ventures that have the potential to generate significant returns.
SEIS, on the other hand, specifically targets very early-stage companies in the process of raising pre-seed capital. It aims to provide funding to startups and entrepreneurs who may find it challenging to secure traditional financing.
VCTs have a broader investment focus and invest in a diverse portfolio of companies across different sectors. They often target more established companies that require additional capital for expansion and development.
Analysing the investment focus of EIS, SEIS, and VCTs is important for investors to align their investment strategies with the specific goals and objectives of each scheme.
Making investment choices
Understanding the eligibility criteria, tax benefits, and investment focus of EIS, SEIS, and VCTs is crucial for making strategic investment choices.
Investors should carefully evaluate their own financial situation, risk tolerance, and investment objectives before deciding which investment scheme to participate in.
Additionally, conducting thorough research on the companies and sectors targeted by each scheme can help investors identify potential investment opportunities and make informed investment decisions.
By making strategic investment choices, investors can maximise their chances of achieving their financial goals while taking advantage of the tax benefits offered by EIS, SEIS, or VCTs.
