How can I minimise my tax burden?

SEIS, EIS & VCT: Meet the government-backed schemes providing tax incentives to those who invest in startups

At SFC Capital, we understand the importance of maximising returns while minimising tax burdens for our investors. SEIS, EIS, and VCT are all government-backed schemes that provide tax incentives for individuals who invest in early-stage companies.

SEIS, especially, hit the news recently because of changes to the scheme that came into force in April 2023. This update to SEIS has fundamentally altered the landscape of SEIS and shifted the profile of investors.

• Investors are now able to invest a maximum of £200,000 per year in SEIS – previously £100,000.
• Companies are now able to raise SEIS within three years of trading – previously two years.
• Companies are now able to raise £250,000 in SEIS – previously £150,000.
• Companies must have less than £350,000 in gross assets – previously £200,00.

SFC Capital has Britain’s leading and largest SEIS fund, so we know a thing or two about handling new investors, but even for us the demand from IFAs since has been unprecedented. The shift in risk profile and amount investors can invest has made the scheme a must-have for many IFAs today.

All of the schemes are designed to support the growth of small businesses and encourage investment in high-risk, high-reward companies. However, there are some key differences, and it's important for investors to understand these differences in order to make the most of the tax benefits they offer. In this article, we will cover the key questions asked by investors about the scheme, including:

• What are SEIS, EIS and VCT and how do they differ?
• How can investors take advantage of the tax benefits offered by SEIS, EIS and VCTs?
• What are the eligibility criteria for SEIS, EIS and VCT investments?
• How do SEIS, EIS and VCT investments affect an investor’s capital gains and income tax?
• Are there any restrictions or limitations on SEIS, EIS and VCT Investments?
• What are the risks associated with SEIS, EIS and VCT investments and how can investors mitigate them?
• What are the benefits of SEIS, EIS and VCT investments and how can investors make the most of them?
• What are the best practices for investors when investing in SEIS, EIS and VCTs?
• How do SEIS, EIS and VCT investments compare to other types of investments?
• Investing in SEIS or EIS Funds VS Direct investing

What are SEIS, EIS and VCT and how do they differ?

SEIS, EIS and VCTs are all government-backed schemes that provide tax incentives for individuals who invest in early-stage companies.

SEIS stands for the Seed Enterprise Investment Scheme and is designed to support early-stage companies. The government wants to encourage people to invest in these high-risk, high-reward companies, so they offer generous tax reliefs as an incentive.

EIS on the other hand, stands for Enterprise Investment Scheme, and it supports a slightly more developed stage of companies. The tax reliefs offered under EIS are still very attractive, but not as generous as the ones offered under SEIS.

VCT, or Venture Capital Trusts, is another government-backed scheme that encourages investment in early-stage companies. VCTs are publicly listed companies that invest in small and medium-sized businesses, and they also offer tax incentives to investors. The main difference between VCT and the other two schemes is that VCT investments are seen as less risky, but also less generous in terms of tax reliefs.

How can investors take advantage of the tax benefits offered by SEIS, EIS and VCTs?

SEIS, EIS, and VCTs all offer attractive tax benefits for investors who are willing to take on the risk of investing in early-stage companies. Here's a breakdown of how investors can take advantage of these benefits:

SEIS:

• Investors can claim 50% income tax relief on investments of up to £200,000.
• They can also claim capital gains tax (CGT) relief on any gain made on the disposal of SEIS shares, provided they have held the shares for at least three years.
• Losses on SEIS shares can also be set against income.
• They can also choose to carry back the relief to the previous tax year, allowing them to claim a higher tax refund.

EIS:

• Investors can claim 30% income tax relief on investments of up to £2,000,000.
• They can also claim CGT relief on any gain made on the disposal of EIS shares, provided they have held the shares for at least three years.
• Losses on EIS shares can also be set against income.
• They can also choose to carry back the relief to the previous tax year, allowing them to claim a higher tax refund.

VCT:

• Investors can claim 30% income tax relief on investments of up to £200,000.
• They can also claim CGT relief on any gain made on the disposal of VCT shares, provided they have held the shares for at least five years.

It's important to note that in order to qualify for these tax benefits, investors must meet certain criteria and the companies they invest in must also meet certain requirements. It's essential for investors to seek professional advice before making any investments and ensure that they meet the necessary conditions to claim the tax reliefs offered.

What are the eligibility criteria for SEIS, EIS and VCT investments?

In order to qualify for these incentives, both the investors and the companies they invest in must meet certain criteria. Here's a breakdown of the eligibility criteria for each scheme, from April 2023:

SEIS:

• Investors can invest a maximum of £200,000 per year in SEIS.
• Companies can raise SEIS within three years of trading.
• Companies will can raise £250,000 in SEIS.
• Companies must have less than £350,000 in gross assets.

EIS:

• Investors can invest a maximum of £2,000,000 per year in EIS.
• The company must be a new, unquoted and independent business that carries on, or plans to carry on, a qualifying trade.
• The company must have fewer than 250 employees and gross assets of less than £15 million.
• The company must not be controlled by another company or by a VCT.

VCT:

• The company must be unquoted and must carry on a qualifying trade.
• The company must have fewer than 250 employees and gross assets of less than £15 million.
• The company must not be controlled by another company or by a VCT.

How do SEIS, EIS and VCT investments affect an investor's capital gains and income tax?

These incentives can have a significant impact on an investor's capital gains and income tax. Here's a breakdown of how each scheme affects these taxes:

SEIS:

• Investors can claim 50% income tax relief on investments of up to £200,000.
• They can also claim CGT relief on any gain made on the disposal of SEIS shares, provided they have held the shares for at least three years.
• Losses on SEIS shares can also be set against income.

EIS:

• Investors can claim 30% income tax relief on investments of up to £2,000,000.
• They can also claim CGT relief on any gain made on the disposal of EIS shares, provided they have held the shares for at least three years.
• Losses on EIS shares can also be set against income.

VCT:

• Investors can claim 30% income tax relief on investments of up to £200,000.
• They can also claim CGT relief on any gain made on the disposal of VCT shares, provided they have held the shares for at least five years.

It's important to note that in order to qualify for these tax benefits, investors must meet certain criteria and the companies they invest in must also meet certain requirements. It's essential for investors to seek professional advice before making any investments and ensure that they meet the necessary conditions to claim the tax reliefs offered.

Are there any restrictions or limitations on SEIS, EIS and VCT investments?

Like any investment, there are certain restrictions and limitations to these schemes that investors should be aware of. Here's a summary of some of the main restrictions and limitations for each scheme:

SEIS

• The maximum amount that can be invested per year is £200,000.
• The maximum amount that can be raised per company is £250,000.
• The shares must be held for a minimum of three years to qualify for CGT relief.

EIS:

• The maximum amount that can be invested per company per year is £2,000,000.
• The maximum amount that can be raised per company per year is £5,000,000.
• The shares must be held for a minimum of three years to qualify for CGT relief.
• The company must not be controlled by another company or by a VCT.

VCT:

• The maximum amount that can be invested per company per year is £200,000.
• The shares must be held for a minimum of five years to qualify for CGT relief.
• The company must not be controlled by another company or by a VCT.

It's important to note that these restrictions and limitations are subject to change and it's essential for investors to seek professional advice and check the most up-to-date restrictions and limitations before making any investments.

What are the risks associated with SEIS, EIS, and VCT investments and how can investors mitigate them?

SEIS, EIS, and VCT investments are all high-risk investments as they involve putting money into early-stage companies that have yet to establish a track record of success. Here are some of the risks associated with these investments and tips on how to mitigate them:

• Investment Risk: The risk that the company in which you have invested may not perform as well as expected, leading to a loss of your investment. To mitigate this risk, investors should conduct thorough research on the company or fund before investing.
• Market Risk: The risk that the market conditions will change, leading to a decline in the value of your investment. To mitigate this risk, investors should diversify their portfolio by investing in a range of companies and sectors.
• Liquidity Risk: The risk that you will not be able to sell your shares easily or at a fair price. To mitigate this risk, investors should invest in companies that have a clear exit strategy, such as a plan to list on a stock exchange.
• Tax Risk: The risk that the tax reliefs offered by the schemes may change or be withdrawn. To mitigate this risk, investors should stay informed about any changes to the schemes and seek professional advice to ensure they understand the tax implications of their investments.

It's important to note that these schemes are subject to change and it's essential for investors to seek professional advice and check the most up-to-date requirements before making any investments.

What are the benefits of SEIS, EIS, and VCT investments and how can investors make the most of them?

Here are some of the benefits of these investments and tips on how to make the most of them:

• Tax Reliefs: SEIS offers 50% income tax relief on investments of up to £200,000, EIS offers 30% income tax relief on investments of up to £2,000,000 and VCT offers 30% income tax relief on investments of up to £200,000. These reliefs can significantly reduce the overall cost of investing in early-stage companies.
• Capital Gains Tax (CGT) Relief: SEIS and EIS investors can claim CGT relief on any gain made on the disposal of shares provided they have held the shares for at least three years, and VCT investors can claim CGT relief on any gain made on the disposal of shares provided they have held the shares for at least five years.
• Loss Relief: Losses on SEIS and EIS shares can be set against income.
• Diversification: Investing in early-stage companies allows investors to diversify their portfolio and potentially achieve higher returns.

What are the best practices for investors when investing in SEIS, EIS and VCTs?

It's important to follow best practices to make informed decisions and maximise the chances of success. Here are some best practices for investors when investing in these schemes:

• Conduct thorough research: Before investing in any company or fund, conduct thorough research on the company, its management team, and its industry to make sure it's a sound investment.
• Seek professional advice: Get professional advice from a financial advisor or accountant to understand the tax implications of your investment and make sure you meet the requirements for the tax reliefs offered by the schemes.
• Diversify your portfolio: Diversifying your portfolio by investing in a range of companies and sectors through SEIS and EIS Funds can help mitigate the risks associated with investing in early-stage companies.
• Understand the risks: Understand the risks associated with investing in early-stage companies and make sure you're comfortable with the level of risk before investing.
• Keep detailed records: Keep detailed records of your investments, including the dates of the investments, the amount invested, and any correspondence with the company. This will be useful if you need to prove that you meet the requirements for the tax reliefs.
• Stay informed: Stay informed about any changes to the schemes and the tax laws, as they are subject to change.

By following these best practices, investors can make more informed decisions and have a better chance of success when investing in SEIS, EIS and VCTs.

How do SEIS, EIS and VCT investments compare to other types of investments?

SEIS, EIS, and VCT investments are government-backed schemes that offer tax incentives to individuals who invest in early-stage companies. However, they differ from other types of investments in several ways. Here's a comparison of SEIS, EIS, and VCT investments to other types of investments:

• Tax incentives: SEIS, EIS, and VCT investments offer tax incentives such as income tax relief and CGT relief, which are not typically available with other types of investments.
• Risk: SEIS, EIS, and VCT investments are high-risk investments as they involve putting money into early-stage companies that have yet to establish a track record of success. Other types of investments, such as bonds and index funds, tend to be lower risk.
• Return: SEIS, EIS, and VCT investments have the potential for high returns, but there is also a higher risk of losing your investment. Other types of investments, such as bonds and index funds, tend to have lower returns but also lower risk.
• Diversification: SEIS, EIS, and VCT investments allow investors to diversify their portfolio and potentially achieve higher returns by investing in a range of companies and sectors. Other types of investments, such as bonds and index funds, typically offer diversification within a specific asset class.

Investing in SEIS or EIS funds vs Direct investing

Investing in an SEIS or EIS fund offers several advantages over making a single direct investment in a single company. One of the main advantages is the ability to spread risk. By investing in a fund that holds a diversified portfolio of companies, investors can reduce their risk by spreading their investment across multiple companies and sectors. This means that if one company in the portfolio underperforms, the overall performance of the fund is less likely to be affected.

Another benefit of investing in an SEIS or EIS fund is the ability to capture multiple growth market opportunities. A fund management team will typically have a deep understanding of different growth markets and will be able to identify the most promising opportunities. This allows investors to access a wider range of investment opportunities and potentially achieve higher returns than they would by investing in a single company.

Using the skill and experience of a fund management team is another important advantage of investing in an SEIS or EIS fund. A professional fund management team will have the knowledge and expertise to conduct thorough due diligence on the companies in the portfolio, and will be able to make informed investment decisions. This can help investors avoid costly mistakes and increase the chances of success.

In conclusion, SEIS, EIS and VCT are government-backed schemes that provide tax incentives for individuals who invest in early-stage companies. Each scheme offers different tax benefits and is suitable for different types of investors, based on their risk appetite and investment objectives.

Investing in an SEIS or EIS fund offers several advantages over making a single direct investment in a single company, such as the ability to spread risk, capture multiple growth market opportunities, using the skill and experience of fund management teams and greater flexibility and liquidity. It is important for investors to understand the differences between the schemes and to seek professional advice before making any investments.

By taking advantage of the tax benefits offered by SEIS, EIS and VCTs, and following best practices when investing, investors can potentially achieve higher returns while mitigating the risks associated with investing in early-stage companies.

Capital at risk. For professional investors only.

Tax benefits are subject to individual circumstances. Subject to changes.

Further information:

HS393 Seed Enterprise Investment Scheme - Income Tax and Capital Gains Tax reliefs (2020) - GOV.UK (www.gov.uk)

HS341 Enterprise Investment Scheme – Income Tax relief (2020) - GOV.UK (www.gov.uk)

Tax relief for investors using venture capital schemes - GOV.UK (www.gov.uk)