SEIS & EIS Loss Relief For Insolvent Companies: Our Guide
In this guide we’ll explain how SEIS and EIS loss relief works if a company you invest in becomes insolvent or enters liquidation.
In the tax year 2021-22, there was record interest in the EIS scheme. Nearly 5,000 firms raised a total of £2.3bn in funds under the EIS scheme, according to government statistics.
There are several tax incentives that appeal to investors with these two schemes – for example, EIS deferral relief and SEIS tax relief.
Moreover, in the event of a company struggling financially, there is some level of both SEIS and EIS loss relief available to investors.
What is EIS?
EIS is a program providing tax benefits to individual investors that purchase new shares in a company. Introduced back in 1994, it stands for the Enterprise Investment Scheme.
This scheme can make a company more attractive to investors, helping it to raise funds and grow its business. A business using EIS can raise up to £5m per year but there is a lifetime limit of £12m.
These limits apply to amounts a business receives from other venture capital schemes, where the initial investment takes place within seven years of the company’s first sale.
Companies that are eligible for EIS:
- Have a permanent presence in the UK
- Do not have gross assets worth more than £15m before issuing shares, or £16m straight after
- Are not trading on a recognised stock exchange at the time of issuing shares and do not plan to join in the future
- Do not control another business, except for qualifying subsidiaries and are not controlled by another company (with over 50% of its shares) either
- Do not expect to close after completing a set series of projects or one agreement
There are other requirements too. For example, money raised by a new share issue should support a qualifying trade. The business should spend it within two years.
For more information, here is the full government guide to EIS.
What is SEIS?
SEIS is similar to EIS but the government created it with smaller businesses in mind. It stands for the Seed Enterprise Investment Scheme and began in 2012, so 18 years after the introduction of EIS.
Qualifying businesses can receive a maximum of £250,000 through SEIS. Qualifying criteria include the following – eligible small companies:
- Have a permanent presence in the UK
- Have been trading for no longer than three years so far
- Have fewer than 25 full-time employees in total at the time of issuing shares
- Do not have gross assets over £350,000 at the time of issuing shares
- Are not a member of a partnership
Money raised by a new share issue should support a qualifying trade. A business should spend it within three years. That’s one year longer than for companies using EIS.
As with EIS, there are other qualifying criteria too – here is the full government SEIS guide.
How to claim EIS loss relief vs SEIS loss relief for struggling businesses
There is up to a 50% income tax break for investors. That’s as well as a Capital Gains Tax bill (CGT) exemption on profits from share sales kept for at least three years. For investors, the official guidance is as follows:
- EIS: Invest up to £1m per year in a qualifying business – or £2m in a knowledge intensive company – and receive a 30% income tax break
- SEIS: Invest up to £200,000 per year in a qualifying company and receive a 50% income tax break
Crucially, investors also receive relief to reduce losses if the company performs well below expectations or struggles financially. In other words, when a company is insolvent or going through one of the different types of liquidation.
Investors purchasing shares in a SEIS or EIS company, then selling them at a loss, can offset this against your CGT and income tax bill through a self-assessment tax return.
How much loss relief is available? In terms of how to claim loss relief, here are a couple of examples.
First, for EIS income tax relief, from Wealth Club – an investment service in the UK:
- The investment cost is £10,000 and eventually sold for £2,000, so the allowable loss is £8,000
- At a higher income tax of 45%, the amount to claim as loss relief against income tax could be £3,600, i.e. £8,000 x 45%
- At a CGT rate of 20% for higher rate taxpayers, the amount of loss relief would potentially be £1,600 (£8,000 x 20% = £1,600)
And for SEIS, here is an example from Syndicate Room:
- After investing £1,000 in an eligible company, an individual claims £500 in income tax relief
- If the company fails, they multiply the investment less income tax relief by the income tax bracket – e.g. the higher rate of 45%
- Therefore, the investor claims a further £225 in loss relief, applied as either income tax relief or set against CGT
These are only indicative examples, outlining how not to pay too much income tax in such scenarios via EIS and SEIS. They are also intended to show how investors could see some benefit from loss relief if the companies they support financially enter insolvency or liquidation.
Final thoughts: SEIS & EIS loss relief
While the upfront income tax relief claimed can offer some reassurance to investors, naturally, the better scenario is for a company that’s struggling financially to turn itself around wherever possible.
Company administration is a potential effective rescue option for businesses facing insolvency. Temporary protection from creditor claims gives businesses time to form a plan of action regarding their debts.
Compared to a compulsory liquidation, a Creditors’ Voluntary Liquidation (CVL) is a better alternative. While it is not a rescue procedure, in some cases, it can result in the affected business being purchased by another company and eventually, continuing to trade.
With a Company Voluntary Arrangement (CVA), the company continues to trade while entering into an agreement with creditors to pay back its debts. It is a good way to avoid liquidation, ease pressure from creditors and also, improve cash flow.
For more information, read about the difference between a CVL and CVA here. And recently, we’ve written an in-depth guide covering all the different business recovery options for insolvent businesses.
Whether you need business financial advice or recovery services… Our team of insolvency practitioners at Hudson Weir are here to help. Please don’t hesitate to get in touch.
