Rise of the Online Angel Investor series: #5
In an attempt to encourage investment into smaller companies, the UK Government introduced some tax incentives. The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) offer different breaks, depending on both the personal circumstances of the investor and what stage of business the investment is made into.
Some businesses can be both SEIS and EIS qualifying. In fact, that’s the case for some of the businesses currently listed on GrowthFunders.
If the investee company is eligible for SEIS and/or EIS, then investors who invest early (up to £150,000) receive 50%, whilst those who invest after that threshold, receive 30%.
They are a start up business who need to raise £500,000. Let’s take a quick look at how the investment amounts could be split between the three types of investor (online business angels, more experienced angels, and institutional investors) in terms of The Soccer Factory:
£20,000 - £50,000 from the “crowd” (suitably-qualified online business angels)
£200,000 - £230,000 from experienced business angels and angel networks
£250,000 match-funding from a VC
Investors in first £150,000 will receive tax breaks through SEIS, which are particularly attractive to both smaller investors and experienced angels.
The balance can then be secured from institutional investors, which is facilitated through GrowthFunders’ syndicated approach which brings together the crowd, angels, and VCs in investment opportunities.
Introduced in 2012, SEIS (also referred to as Seed EIS) is available on investments made into businesses which need to meet certain requirements in order to qualify, such as being in the seed stage of growth, usually meaning that they have just come into existence, and have fewer than twenty-five employees.
Investments made up to the amount of £150,000 are eligible for a tax break of 50% and, subject to the circumstances of the investor and success of the investee company, could end up being up to a 64% tax relief.
So, investing £1000 into businesses which have SEIS forward assurance will only cost you £500 (50% tax relief).
Although SEIS helps to mitigate risk, start up and early stage businesses should not form the majority of your investment portfolio. We’ll talk more about this in a blog coming next week.
SEIS has two main purposes: it encourages investors, thereby introducing some much-needed seed capital for start ups, and it also helps to mitigate risk for the investor.
If more than £150,000 is invested into a business which is SEIS eligible, only those who invested up to that £150,000 will receive the associated relief.
This is the big brother of SEIS; longer running and higher investment amounts. In order for the business to be able to offer EIS on investments made into them, they have to have been operational (trading) for over two years and have up to 250 employees.
Whereas the upper limit for SEIS-qualifying investments is £150,000, it is £500,000 (from an individual) and £2million (in any one tax year) for EIS. As well as offering 30% tax relief to investors, it also provides capital gains relief on the sale price of shares, three years after the initial investment was made.
One more thing...
Providing that the bought shares are held for a minimum of three years, any gains are capital gains tax free!
The argument for investing into SEIS and EIS-compliant businesses just seems to get stronger, doesn’t it? Before you do, though, we can’t stress enough the importance of understanding SEIS and EIS and how it could form part of your risk mitigation strategy. For more information, please see these resources:
Or, if you’re ready for some heavy reading, you can always check out what HMRC has to say about SEIS and EIS - it’s hard-going, but they are the experts.
To find out more about the world of online angel investing, download our free eBook and learn all you need to know before considering your first investment.