This is day 11 of our Tax & Accounting at Christmas Special, as we analyse the tax and accounting treatments of all things Christmassy and open a door in our Christmas Advent calendar to count down each working day until the Christmas holidays in the UK. 

The Business Angel

The Angel Gabriel, it is told, played a major part in the Christmas nativity story as it was he who predicted the birth of Jesus. For those starting out in business who need funding from external sources, a different type of angel plays an important role, that of the Business Angel.

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) Relief

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are two similar tax incentivised vehicles, intended to promote external investment in smaller unquoted trading companies.

  • In each case, investment grants relief from income tax and capital gains tax. Qualifying EIS investments secure 30% income tax relief, SEIS investments achieve 50% relief.
  • Under EIS 100% of capital gains can be deferred, under SEIS this is restricted to 50%.
  • Gains on the shares themselves will be exempt from capital gains tax if they are held for three years (without the scheme rules being violated) and share losses can be set against income.
  • Also in both cases, an investment can be treated as having occurred in the prior year for tax purposes. E.g. an investment made in 2018/19 could reduce your 2017/18 tax bill (due 31 January 2019).
  • It is possible to claim EIS relief on shares in a company which has previously qualified for SEIS relief but not vice versa; once EIS relief has been claimed for a company SEIS relief is no longer possible.
  • See SEIS & EIS: tax relief examples

The conditions for relief:

  • The conditions for investments to be eligible for relief are strict and there is no flexibility in the rules.
  • Many of these are the same for EIS and SEIS but there are some differences which should not be overlooked.
  • See Which investment relief: IR, ER, SEIS or EIS?

Advance assurance can be applied for from HMRC before shares are issued to ensure that they will qualify for relief.

  • The shares must be fully paid up ordinary shares which are newly issued and which must be held for at least three years.
  • The company must carry on a Qualifying trade and not participating in excluded activities.
  • The company must be below a certain size and, for SEIS, have been trading for less than 2 years. 
  • The funds raised must be used for Qualifying activities within a set time period.
  • The investor must not be connected to the company whether directly or via their associates. In some cases directors can qualify but care must be taken to ensure the connection test is not breached.
  • Business angels can receive a reasonable remuneration for services and expertise and not be connected for the purposes of the reliefs. 
  • Each relief has an investment cap beyond which no relief is available. This is £150,000 for SEIS and £5m per year (£1m per investor) for EIS. The EIS limits are higher for “Knowledge intensive companies”. 
  • The new “Risk to capital”  condition must be met.

Difficult areas

Links to our subscriber guides:

EIS: Enterprise Investment Scheme (Subscriber guide)

SEIS: Seed Enterprise Investment Scheme (subscribers) 

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