Alternatives to loan financing
9 May 2023
With interest rates rising, businesses are looking at alternatives to loan finance. At Birketts we have seen first-hand an increase in clients exploring whether their companies could issue tax beneficial Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) qualifying shares to raise funds. In addition, since April 2023, the SEIS rules have been relaxed to make the scheme more attractive to investors and qualifying companies alike.
What is SEIS?
SEIS offers attractive tax incentives to investors in new shares in qualifying start-up companies with the aim to encourage investment in riskier businesses. The tax benefits include:
- investors reducing their income tax liability by 50% of the sums invested in SEIS qualifying shares up to an annual investment limit per investor (currently £200k)
- any gains arising on the sale of the SEIS qualifying shares should be exempt from capital gains tax (CGT), provided that the shares have been held for at least three years and provided investors have successfully reduced their income tax liability using SEIS relief
- it may be possible for investors to benefit from a full or partial deferral of CGT on gains arising on the disposal of assets where a qualifying investment in SEIS qualifying shares is made within specified times scales. As this works as a deferral rather than a full exemption from tax, the deferred gain will, in broad terms, come back into charge on sale of the SEIS qualifying shares. There are limits on the maximum gain that can benefit from the deferral (currently £200k).
What is EIS?
EIS also offers attractive tax incentives. EIS is open to larger companies and the tax incentives are not as attractive. The tax benefits include:
- investors can reduce their liability to income tax by 30% of the sums invested in EIS qualifying shares up to an annual investment limit per investor (currently £2m but any investment over £1m must be invested in ‘knowledge-intensive’ companies)
- any gains arising on the sale of the EIS qualifying shares should be exempt from CGT, provided that the shares have been held for at least three years and provided investors have successfully reduced their income tax liability using EIS relief
- it may be possible for investors to benefit from an unlimited deferral of CGT on gains arising on the disposal of assets where a qualifying investment in EIS qualifying shares is made within specified times scales. As this works as a deferral rather than as a full exemption from tax, the deferred gain will, in broad terms, come back into charge on sale of the EIS qualifying shares.
Birketts’ SEIS and EIS Checker
With such tax benefits on offer, the ability to qualify for SEIS and/or EIS will often prove highly attractive to potential investors. However, the rules are complex and it is therefore important to consider these in detail. We would advise that an advance assurance is obtained from HMRC so that the company raising the finance can be confident that it qualifies. However, as the rules are complicated, we have developed a Checker so that companies can quickly establish, in broad terms, whether they are likely to qualify for SEIS and/or EIS prior to seeking advance assurance.
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Karl Pocock
Services
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2023.