SEIS and EIS explained for early-stage investors

Investing in a young company is, in pure financial terms, an unattractive proposition. The failure rate is high, the holding period is long, and there is no market to sell into if you change your mind. The UK government's answer to that — because it wants early-stage companies to get funded anyway — is a pair of tax schemes that shift part of the downside from the investor to the Exchequer: the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).

They are genuinely generous. They are also conditional in ways that catch people out. This article sets out the mechanics as they apply to an individual investor, what has to be true for the reliefs to be available, and the questions worth asking before you treat a relief as banked.

Two schemes, two stages of company

The simplest way to hold the distinction is by company maturity. SEIS is aimed at the very earliest stage — young, small companies that in many cases have little or no trading history. EIS is aimed at companies that are still early but further along, and it allows larger amounts to be raised.

Thresholds and limits are set by legislation and change from time to time. Treat the table above as orientation and verify the current position with HMRC's guidance or your adviser before you act on it.

The reliefs, one at a time

Income tax relief

The headline. Under SEIS you can claim income tax relief of 50% of the amount subscribed for qualifying shares; under EIS, 30%. The relief reduces your income tax liability for the year, and it cannot exceed the tax you actually owe. Both schemes also allow the investment to be treated as though it were made in the previous tax year — 'carry back' — which can be useful where your liability was higher then.

Capital gains tax exemption

If you received and retained income tax relief on the shares, and you hold them for at least three years, any gain when you dispose of them is exempt from capital gains tax. This is the relief that matters most in the scenario everybody is actually hoping for.

Loss relief

If the shares are disposed of at a loss, the loss — net of the income tax relief already received — can be set against income or against capital gains. This is the reason people describe these schemes as changing the downside profile: the effective cost of a total loss is materially lower than the amount invested, though the precise figure depends entirely on your marginal rate and your circumstances.

CGT deferral (EIS) and reinvestment relief (SEIS)

EIS allows a chargeable gain made elsewhere to be deferred by reinvesting it into EIS shares; the gain comes back into charge when the EIS shares are disposed of or the conditions cease to be met. SEIS offers reinvestment relief, which can exempt part of a gain reinvested into SEIS shares. Both are commonly the deciding factor for investors who have recently realised a gain — for example on a property or a business sale.

Inheritance tax

Shares in many qualifying trading companies may attract business relief for inheritance tax purposes after two years of ownership. This is a separate regime from SEIS/EIS with its own conditions, and the rules in this area have been subject to change — it should never be assumed without advice.

The conditions that actually bite

Three separate sets of conditions have to hold: on the company, on the shares, and on you as the investor. Most problems arise because someone was only watching one of them.

• The company must be carrying on a qualifying trade. A long list of activities is excluded, including most financial services, property development, leasing and legal or accountancy services.
• The money must be spent on growing the business within a set period — generally three years for SEIS and two for EIS — and not on acquiring another business or repaying debt.
• The shares must be new, full-risk ordinary shares, paid up in cash, with no preferential rights to assets on a winding up and no arrangements to protect the investor from the ordinary risks of the business.
• You must not be connected to the company — broadly, an employee, a partner, or a holder (with associates) of more than 30% of the share capital or voting rights. SEIS treats directors more permissively than EIS does, but the detail matters.
• There must be no pre-arranged exit, no linked loan and no reciprocal arrangement between investors.
• The investment must satisfy the risk-to-capital condition: the company must be seeking to grow and develop long-term, and the investment must carry a genuine risk of loss of capital greater than the net return.

Advance assurance is not a guarantee

Companies routinely apply to HMRC for advance assurance before a raise: an indication that, on the information provided, the proposed share issue would be likely to qualify. It is genuinely useful and its absence should prompt questions. But it is an indication based on a described plan, not a ruling on what actually happened.

The document that lets you claim is the compliance certificate — an SEIS3 or EIS3 — which the company can only issue after HMRC authorises it, and only once the company has been trading for four months or has spent at least 70% of the money raised. Between investing and receiving that certificate there is a real, if usually uneventful, gap. Plan for it.

How the claim actually happens

1. 01You subscribe in cash for new ordinary shares and the shares are issued.
2. 02The company meets its trading or spending threshold and submits a compliance statement to HMRC.
3. 03HMRC authorises the company to issue certificates; you receive your SEIS3 or EIS3.
4. 04You claim on your self assessment return for the relevant year, using the details on the certificate — or carry the investment back to the previous year.
5. 05You hold the shares for at least three years, and avoid becoming connected or receiving value, so the relief is not withdrawn.

What this means for venture-built companies

Early-stage companies created through a structured build are often, by their nature, the kind of company these schemes were designed for: new, unquoted, trading in a qualifying activity, raising cash to grow, and carrying genuine risk of capital loss. Whether any particular company or share issue qualifies is a matter for the company and HMRC, not for the venture builder — and it should be confirmed rather than assumed.

What the schemes usefully change is the sizing conversation. Because the reliefs cushion the downside, investors who use them can often build a wider spread of positions for the same effective exposure — which matters a great deal in an asset class where outcomes are highly dispersed. We discuss that in building an early-stage investment portfolio.

What the schemes do not change is whether the business is any good. Tax relief on a company that should never have been funded is still a loss. Investors we work with treat qualification as a structural feature and spend their diligence time on the commercial substance instead — a subject covered in assessing risk in early-stage companies.

Opportunities in Growth Capital Ventures companies are made available through GCV Invest to investors who meet the relevant criteria; how GCV Labs and GCV Invest work together explains that structure and why the two are deliberately kept distinct.