Reason #4: Tax Breaks

The Small Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) in the UK offer a variety of tax breaks for individuals who invest in early-stage companies that meet EIS/SEIS requirements. They are specifically designed to help small companies raise equity finance by making it attractive for individuals to to buy their shares. Here’s my understanding of how these work.

EIS first: as of April 2012, relief of 30% of the cost of the shares can be set against your Income Tax liability for the tax year in which you make the investment. You can invest up to £1m in such shares and you must hold the shares for 3 years. If you dispose of the shares after 3 years, any gain is free from Capital Gains Tax. If there are no Capital Gains, ie you sell your shares at a loss, then you can set the amount of the loss (less any Income Tax relief given) against income of the year in which you sell, or any income of the previous year.

SEIS: follows the same rules as EIS, but relief is available at 50% on a maximum annual investment of £100,000.

Investors don’t need to be UK residents but will need to have a UK tax liability against which to set the relief. Dividend income doesn’t qualify.

There’s obviously a lot more to this than I’ve covered here, but hopefully this gives a basic understanding. Before I sign off though, a quick health warning: while the tax breaks certainly help offset some of the risk in investing in early-stage companies, they aren’t a substitute for a sound business plan and a founder/team who is able to execute.