The UK government have some brilliant schemes in place to make investing in early-stage companies a more attractive and rewarding opportunity. Here are the two schemes you need to be aware of:

SEIS (Seed Enterprise Investment Scheme)

This scheme relates to companies that are very early stage and have only been trading for up to 3 years. This scheme provides the investor with 50% of their investment amount in a company back in tax relief. You will have no capital gains tax liability on any upside.

For example, if you invest £100,000 in an SEIS-eligible company you can claim to get 50% of that investment back in tax relief (in this case that’s £50,000). This means that even if your investment was to fall in value by 50% you have broken even.

EIS (Enterprise Investment Scheme)

This scheme relates to companies that are early stage and have only been trading for up to 7 years. This scheme provides the investor with 30% of their investment amount in a company back in income tax, as long as you have paid it. You will have no capital gains tax liability on any upside.

For example, if you invest £100,000 in an EIS-eligible company you can claim to get 30% of that investment back in tax-relief (£30,000). This means that even if your investment was to fall in value by 30% you have broken even.

A few additional benefits of investing under these schemes

You are exempt from capital gains tax (CGT) on any gains on these investments.
And in the event that a company doesn’t work out, you also receive loss relief of up to 50% of your investment amount (the actual percentage depends on your income tax bracket).

Are you eligible to claim tax relief on your investment?

You must be an individual taxpayer in the UK
You must invest as an individual, not via a company

You cannot be an employee of the company at the time of the investment
You must not have a substantial interest in the company or any associated entities, generally deemed as more than a 30% shareholding.
Your investments via the scheme must be within your yearly allowance (£200k for SEIS and £1M for EIS)
You must hold the shares for at least 3 years

How to ensure the company you’re investing in is eligible for S/EIS

Ask the founders to provide you with an advance assurance letter from HMRC. This doesn’t guarantee that they will get it, but it essentially means their investment opportunity meets all the criteria as per their application for tax relief.

FOR SEIS THE STARTUP MUST:

be a UK-based company
trading for less than 3 years
have fewer than 25 employees
have £350,000 or less in gross assets

FOR EIS THE STARTUP MUST:

be a UK-based company
trading for less than 7 years
have fewer than 250 employees
not have more than £15 million in gross assets before shares are issued, and not more than £16 million after shares are issued

A note on investment terms

Only Ordinary shares are eligible for S/EIS, meaning you cannot claim this tax relief with preference shares or preferential terms. The scheme states that the investor has to incur the “normal risks of an investor” – i.e. they can’t get a better deal than any other shareholder.

How do you claim the tax relief and how long does it take?

Ensure the company has Advanced Assurance from HMRC before making your investment
After the investment round is closed, the company will request S/EIS certificates from HMRC (this can sometimes take 4-6 weeks)
Once you receive your certificate, simply file it with your tax return
HMRC will send you a cheque in the post with your rebate

Visit gov.uk for more guidance on tax relief for investors.

Angel investor guide to SEIS & EIS tax reliefs