What is the difference between SEIS and EIS?
SEIS offers 50% income tax relief on investments up to £200,000 in very early-stage companies (under 2 years, under £250k raised), while EIS offers 30% relief on up to £1 million in slightly larger companies (under 7 years, up to £5 million raised per year).
Detailed Explanation
SEIS vs EIS: side-by-side comparison
Both schemes offer generous tax relief to investors in qualifying companies, but they target different stages of company growth.
| Feature | SEIS | EIS | |---|---|---| | Income tax relief | 50% | 30% | | Max investment per investor | £200,000/year | £1,000,000/year (£2m for KICs) | | Max raise per company | £250,000 (total) | £5m/year (£12m lifetime) | | Company age | Under 2 years | Under 7 years (10 for KICs) | | Employee limit | Under 25 | Under 250 | | Gross assets limit | Under £350,000 | Under £15 million | | CGT exemption | Yes (after 3 years) | Yes (after 3 years) | | CGT reinvestment relief | 50% exemption | Full deferral | | Loss relief | Yes | Yes | | Directors can claim? | Yes (if under 30% holding) | No | | Minimum holding period | 3 years | 3 years |
Key differences explained
Tax relief rate
SEIS offers a higher rate (50% vs 30%) because the investment risk is greater with very early-stage companies.
CGT treatment
SEIS provides outright exemption on 50% of reinvested capital gains, meaning the gain disappears permanently. EIS provides deferral, meaning the gain is postponed, not eliminated. However, EIS shares themselves are CGT-free after 3 years.
Director participation
This is a major practical difference. Under SEIS, founder-directors can invest in their own company and claim tax relief (provided they hold less than 30%). Under EIS, directors and employees are completely excluded from claiming relief.
Typical fundraising journey
Most companies use SEIS first for their initial seed round, then progress to EIS for larger rounds:
1. Pre-seed/seed
Raise up to £250,000 under SEIS 2. **Spend 70%+** of the SEIS money on qualifying business activity 3. **Series A onwards
When to use which
- Brand new company with no revenue: **SEIS**
- Company under 2 years old raising under £250k: **SEIS**
- Company that has already used SEIS allowance: **EIS**
- Company between 2-7 years old: **EIS only**
- Raising more than £250k: **EIS** (possibly combined with SEIS)
Both schemes require
- Qualifying trade
- UK permanent establishment
- Not listed on a stock exchange
- New shares issued for genuine commercial purposes
- Money raised must be used for the qualifying business activity within 2 years
Source: HMRC Venture Capital Schemes Manual
Real-World Examples
Seed Funding for a Tech Startup
Your tech startup is 6 months old and needs £150,000 to develop your MVP. Raising this via SEIS attracts investors who can claim 50% income tax relief, making your company more attractive than if you just used standard equity.
Expanding a Growing Business
After 4 years, your sustainable fashion business is ready to scale. An EIS raise of £800,000 helps you expand your manufacturing capabilities. Investors get 30% income tax relief and potential capital gains tax exemption on profits when they sell the shares.
Follow-on Funding for a Knowledge-Intensive Company
Your biotech company, now 8 years old and deemed a Knowledge-Intensive Company (KIC), requires a further £1.5 million to finalise drug trials. You can raise this under EIS, as KICs have extended age and investment limits compared to standard EIS companies.
Common Mistakes to Avoid
- Assuming all companies automatically qualify for SEIS/EIS without obtaining advance assurance from HMRC, leading to wasted time and effort.
- Failing to actively seek SEIS/EIS investors, instead relying on existing networks who may not be eligible or interested.
- Not understanding the detailed SEIS/EIS qualifying criteria, such as the permitted trading activities or the gross assets limits, and inadvertently disqualifying the company.
- Confusing the tax reliefs available to the *company* with the reliefs available to the *investor*; SEIS/EIS provides reliefs for investors, making the investment proposition more attractive.
Frequently Asked Questions
What happens if my company fails after receiving SEIS/EIS investment?
Investors can claim 'loss relief' if the company fails and the shares become worthless. This means they can offset the loss against their income tax liability, providing some mitigation against the investment risk.
Are there any restrictions on what I can do with the funds raised through SEIS/EIS?
Yes, the funds must be used for qualifying business activities to promote the company's growth. Using the money for non-qualifying purposes, such as paying off existing debts, could jeopardise the SEIS/EIS status for both the company and the investors.
Can directors of the company also invest and claim SEIS/EIS relief?
Yes, directors can invest and claim SEIS/EIS relief, but only if they are not 'connected' with the company in certain ways (e.g., owning more than 30% of the company's share capital). Specific rules apply to connected persons so it is always best to get advice.
How long do investors need to hold SEIS/EIS shares to retain the tax benefits?
Investors must hold the shares for at least three years from the date of issue to retain the income tax relief and capital gains tax exemption. Selling the shares before this period can result in a clawback of the tax benefits.
Practical Tips
- Apply for advance assurance from HMRC *before* seeking SEIS/EIS investment; this gives potential investors confidence that your company qualifies.
- Create a compelling investment deck highlighting the potential returns and the tax benefits of investing via SEIS/EIS; tailor your pitch specifically to SEIS/EIS investors.
- Ensure your company's articles of association and shareholder agreements are compliant with SEIS/EIS regulations to avoid any future issues.
- Maintain detailed records of all SEIS/EIS investments and use of funds to demonstrate compliance with HMRC rules if you are ever investigated.
Related Questions
How much can I raise under SEIS?
A company can raise up to £250,000 in total under SEIS. Individual investors can invest up to £200,000 per tax year across all SEIS investments and receive 50% income tax relief.
How much can I raise under EIS?
A company can raise up to £5 million per year under EIS, with a lifetime maximum of £12 million from all venture capital schemes combined. Knowledge-intensive companies can raise up to £10 million per year with a £20 million lifetime cap.
How do I apply for SEIS/EIS advance assurance?
You apply to HMRC's Small Company Enterprise Centre using the online advance assurance form, providing details of your company, trade, and proposed share issue. HMRC typically responds within 4-6 weeks.
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