How to Invest in UK Startups Using SEIS and EIS

Investing in startups can be an exciting and potentially lucrative venture, but it often comes with significant risks. For UK taxpayers, two government-backed schemes, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), provide essential tax reliefs that can make investing in new businesses more attractive. This article will explore how these schemes work, their benefits, and the steps to get started.

Understanding SEIS and EIS

What is SEIS?

The Seed Enterprise Investment Scheme (SEIS) is designed to help small, early-stage companies raise finance by offering a range of tax reliefs to individual investors. It targets companies that are less than two years old, have fewer than 25 employees, and have an annual turnover of less than £200,000. Learn more about SEIS in this guide for UK startups.

What is EIS?

The Enterprise Investment Scheme (EIS) is similar to SEIS but is aimed at slightly larger companies that have been trading for up to seven years. To qualify, a company must have fewer than 250 employees and less than £15 million in gross assets. Explore more about EIS in this comprehensive guide.

Key Tax Reliefs Offered

Both SEIS and EIS provide attractive tax reliefs that can significantly reduce the financial risks associated with investing in startups.

Tax Relief on Investment

• SEIS: You can claim up to 50% income tax relief on investments up to £100,000 per tax year. This means if you invest £10,000, you could reduce your income tax bill by £5,000.
• EIS: Investors can claim 30% income tax relief on investments up to £1 million (£2 million for knowledge-intensive companies). For example, an investment of £10,000 could lead to a £3,000 reduction in your tax bill.

Capital Gains Tax Relief

Another advantage of both schemes is the potential for capital gains tax relief. Read more about capital gains tax allowances in the UK.

• SEIS: If you sell your SEIS shares after three years, any gains made are free from Capital Gains Tax (CGT).
• EIS: For EIS, if you hold your investment for at least three years and later sell the shares for a profit, the gains are also exempt from CGT.

Loss Relief

In the unfortunate event that your investment does not perform well, both schemes allow you to offset the loss against your income tax or capital gains tax. If an SEIS investment loses money, you can deduct the loss from your income, reducing your taxable income.

The Benefits of Investing in Startups

Investing in startups offers more than just tax relief:

• Diversification: Including startups in your investment portfolio can help diversify your assets and reduce overall risk.
• Passion and Impact: Many investors are attracted to startups out of a desire to support innovative ideas and entrepreneurs.
• Potential High Returns: While startups are risky, they can also deliver high returns if the company grows successfully.

How to Get Started

Step 1: Understand the Risks

Before investing, it’s important to be aware of the risks involved. Startups often face high failure rates, and investments can take several years to grow or provide returns.

Step 2: Seek Professional Advice

Consider speaking with a financial adviser who specializes in startup investments or tax-efficient investing. They can help you assess your risk tolerance and identify suitable opportunities. You might also want to explore tax-free savings for more investment options.

Step 3: Find SEIS/EIS Eligible Companies

Look for companies that are registered and compliant with SEIS or EIS. Many platforms and databases cater specifically to investors interested in startups, such as Crowdcube or Seedrs, where you can browse investment opportunities. For a comprehensive overview of eligible companies, visit the UK government's official website.

Step 4: Make Your Investment

Once you've identified a suitable startup and are comfortable with the investment risks, make your investment through the selected platform. Ensure that you receive proper documentation and the necessary SEIS/EIS certificates.

Step 5: Monitor Your Investment

Post-investment, keep an eye on how the startup is performing. Engaging with the company and understanding its growth strategy can help you make informed decisions about your future involvement or potential exit.

Navigating the Startup Investment Journey

Investing in UK startups through the SEIS and EIS is an excellent way to potentially benefit from the growth of innovative companies while enjoying significant tax reliefs. While the risks are considerable, the potential rewards can be substantial. By understanding the schemes, leveraging their tax benefits, and conducting thorough research, you can navigate the startup investment landscape with confidence.

Always remember to consult with a financial adviser before making any investment decision to ensure it aligns with your financial goals.