Originally published April 05, 2021, 08:08: AM, updated March 14, 2022
The government acknowledges the benefits small businesses bring to the UK economy and grants various tax benefits to reward investors for investing in early-stage companies through SEIS and EIS.
Investors who invested in EIS or SEIS qualified companies can take advantage of the loss relief, reducing the impact of losses on an individual company.
This article will explain what SEIS and EIS loss relief is and how you can claim them.
SEIS and EIS
Investors want to maximise returns while minimising risk wherever possible.
Investing in early-stage, unlisted companies carry a higher risk. It is often mitigated by tax reliefs and rewards that limit overall risk while maximising potential upside.
This can be possible with Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), two of the most generous tax benefits available when investing in high-growth, early-stage companies.
HM Revenue & Customs (HMRC) implemented various tax incentives to promote investment in growth-oriented UK companies to minimise risk. SEIS and EIS schemes are an excellent asset class to invest in because they back businesses that drive UK growth.
And although both schemes are identical in several aspects, still, there are differences to be aware of.
For instance, SEIS is aimed at startups and very early-stage companies.
On the other hand, EIS may be used for more extensive and older businesses (although these are still considered small and young in the UK's business and corporate landscapes).
Trade must also be at least two years for the first round of funding for SEIS, while trade must be at least seven years for the first round of funding for EIS.
Additionally, you may have up to £20,000 or less in gross assets before the investment and have only up to 25 employees for SEIS. In comparison, you may have up to £15 million in gross assets before EIS investment, and you may have up to 250 employees.
You can read more about the differences between both schemes here.
Criteria you must meet to be eligible for SEIS and EIS as an investor
Here are the criteria you must meet to be eligible for EIS as an investor:
- Your interest in the company must be less than 30%.
- You must not be a paid director, partner, or employee of the company.
- Your business partners or associates (spouse, relatives, or previous business contacts) are not interested in the company.
- You don't have any preferential shares.
- You don't have any controlling interest in the company.
- You aren't using the plan to avoid paying taxes.
One exemption to the rule is prohibiting related persons working in the business.
This exemption encourages business angels to participate in the scheme because of their roles as directors. Even if paid, business angels may be eligible for a tax reduction if the angel director was not affiliated with the company when the shares were released.
Because the requirements for business angels are strict, it's preferable to obtain assistance from HMRC.
SEIS and EIS Loss Relief
A lesser-known incentive of SEIS/EIS is loss relief.
If an investor buys shares in a SEIS or EIS company and the shares are sold at a loss, loss relief allows the investor to offset the loss against their income tax or capital gains tax bill.
To calculate loss relief, subtract what the investor collected in tax relief from the amount they invested.
Loss relief will not reverse all of the damage, but it will soften the blow depending on the investor's tax bracket.
When does an investor claim loss relief?
EIS Loss Relief
An investor may use loss relief to offset a loss on an EIS business against their capital gains tax bill or income tax bill. An investor may claim loss relief on the year of the loss and then offset the loss against their current tax bill or the previous year.
You could be entitled to obtain tax relief on losses if you made an EIS investment sold at a loss or liquidated. The value of an investment at the selling time must have fallen below the 'net cost' to qualify for relief. The net cost is the amount invested minus any income tax relief you might have previously claimed.
For example, if you invested £30,000 in an EIS-qualifying investment and claimed an income tax relief of £9,000 (30% of the amount you invested), your net investment cost will be £21,000.
SEIS Loss Relief
You could be eligible for loss relief if the company doesn't do well and lose money on your investment.
The amount of loss relief you will get equals the highest income tax you pay.
If you pay income tax at a 45% rate, you may demand income tax relief for up to 45% of your net loss.
For example, if you invest £20,000 in a company that fails and your investment is no longer worth anything, you may be able to claim loss relief.
First, you could claim a 50% income tax deduction (in this case, £10,000). Then you can receive 45% income tax relief on the remaining £5,000 loss, taking the overall loss to just £5,500.
Step-by-Step Guide on How to Claim the Loss Relief
There are two claimants: individual claimants and corporate claimants.
1. Individual claimants
When is the best time to claim loss relief?
If you are an individual claimant, you must file a claim for loss relief on SEIS or EIS related shares (also known as Share Loss Relief) on or before the first anniversary of the usual self-assessment filing date for the year of the loss.
How to claim loss relief?
Loss relief allows investors to exclude losses from either capital gains tax or income tax, whichever is more beneficial. If you file a self-assessment tax return, use the SA108 form to claim SEIS/EIS losses against income tax or capital gains tax.
Against income tax
Share Loss Relief can be given as a deduction in calculating the claimant's net income for the year of the loss or the previous tax year, or both years. The claim must determine the year or years for which relief is to be granted, and if both years are involved, the claim must specify the year is to be deducted first.
Against capital gains tax
You may also offset your SEIS or EIS losses against a capital gains tax bill for the current or future tax years.
2. Corporate claimants
When is the best time to claim loss relief?
A company must claim Share Loss Relief before the expiry of two years after the end of its accounting period in which the permissible loss has occurred.
How to claim loss relief?
To be eligible for Share Loss Relief as a corporate claimant, a company must satisfy three requirements:Condition A – investment company.
The first requirement is that the company must be an investment company during the disposal of the shares.Condition B – the amount of time the company has become an investment company.
The company must have been an investment company for a defined time prior to immediately preceding the disposal date. The period is either:
- Six years; or
- A shorter continuous period if the company was neither a trading company nor an excluded company before the beginning of that shorter period.
Condition C – the relationship to the company invested in.
The company should not be affiliated with or be a member of the same group as its shares it subscribed for and has disposed of. This has to be the case at all times from the time of the subscription and disposal of shares.
How relief is given
A company must claim Share Loss Relief within two years of the end of the accounting period in which the permissible loss occurred.
In the first instance, relief is often granted as a deduction from the company's profits for corporate tax purposes for the accounting period the shares' loss occurred. If there is income from which it could be deducted, the company cannot waive relief during this time.
The company can also claim some surplus relief to be deducted from its profits in previous accounting periods, as long as they fall entirely or partially within the 12 months immediately before the period in which the loss occurred.
However, if the company claims relief for a previous accounting period, it must have been an investment company throughout that earlier period.
Step 1: Deduct relief from the company's profits for the accounting period in which the loss is incurred.
Step 2: Applies if the company claims relief for an earlier accounting period and if there is still relief after step 1. The remaining loss is decreased from the company's profits for an accounting period that comes fully or partially during the 12 months preceding the loss.
If there is more than one earlier period, relief is given in a later period before an earlier period. The relief is given at step 2 only after relief has been given for the period in question regarding Share Loss Relief on an earlier loss.
Claiming SEIS and EIS relief on joint shares
When shares are issued to joint owners (such as a husband and wife), they are treated as though they had subscribed the same amount for the same number of shares.
For example, if £4,000 is paid for 4,000 shares by you and your spouse, each person is considered to have paid £2,000 for 4,000 shares, even if one paid the total cost.
Each joint owner should obtain Form SEIS3 and EIS3 from the company to claim relief.
Do I lose all my investment if the company fails?
Unless a small portion of your investment is redeemed by selling some of the company's properties, you will usually lose all of your money.
If your shares in an EIS and SEIS qualifying company falls to zero, you may file a negligible value claim by informing HMRC, stating that your shares are now worth nothing or next to nothing, even if it hasn't been sold. A loss relief claim usually depends on the price at which you sell your shares.
If the shares have nil value, you may be able to claim the amount of the effective loss. You can speak with your accountant or financial advisor for more details.
Where you can make your SEIS and EIS income tax relief claim
SEIS and EIS income tax relief can be claimed either on your paper tax return, online when submitting your self-assessment tax return, or by mail using pages 3 and 4 of the SEIS3 or EIS3 and EIS5 certificates.
SEIS and EIS offer various benefits to startups and their investors.
However, all investments carry some degree of risk.
While outlining some of the things you need in claiming your SEIS and EIS tax relief, this article doesn't qualify as tax advice.
Before investing, it can be worthwhile to speak to a qualified tax professional to ensure you make the best use of the range of tax reliefs on offer, or you may ask and schedule an appointment with us today.
Trendscout is a London-based platform specialising in Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
Our network of innovative startups and investors allows us to spot up-and-coming prospects before they hit the masses, thanks to our over 30 years of industry expertise and experience.
Rest assured that our team will be with you at every step of your investment journey.