EIS and SEIS Explained

Both are government schemes designed to channel private investment into small, young companies that would otherwise struggle to raise capital. Early-stage companies carry a high risk of failure, and the tax reliefs exist to encourage investment that would otherwise be difficult to attract.

That framing is the right starting point. The reliefs are not a clever structure applied to an ordinary investment; they are the price of taking on an unusually high chance of losing your money. A commonly applied test is whether the underlying investment would still be worth making if no tax relief were available. Whether either scheme is suitable depends on individual circumstances and capacity for loss, and regulated advice may be appropriate.

Companies must qualify, and the qualifying conditions cover the company's age, size, trade and use of the funds. Most reputable offers will have obtained advance assurance from HMRC before raising money, and it is reasonable to ask whether they have.

Income tax relief under EIS is given at 30% of the amount invested. The maximum an individual can claim relief on is £1 million a year, rising to £2 million provided at least £1 million of that is invested in knowledge-intensive companies.

The shares must be held for at least three years. Selling earlier means the income tax relief is withdrawn, so the holding period is a real constraint rather than a formality, particularly given that these shares are difficult to sell at all.

EIS also offers capital gains tax deferral. A gain arising on the disposal of any asset can be deferred by reinvesting in qualifying EIS shares, where the investment is made within the period from one year before to three years after the disposal. The gain is not eliminated; it comes back into charge when the EIS shares are sold, unless it is deferred again. Our article on capital gains tax covers how gains are calculated and taxed in the first place.

There is also loss relief. If EIS shares are disposed of at a loss, the loss net of the income tax relief already received can be set against income or gains, which reduces the worst-case outcome. It does not remove it.

SEIS applies to companies at an earlier stage and gives income tax relief at 50%. The maximum an individual can claim relief on is £200,000 a year. As with EIS, the shares must be held for at least three years.

Instead of deferral, SEIS offers capital gains reinvestment relief. Where you sell an asset and use the gain to invest in qualifying SEIS shares, relief applies to 50% of the investment, up to £200,000. Unlike EIS deferral, this exempts rather than postpones that portion of the gain.

SEIS applies to companies at an earlier stage of development than EIS, which is reflected in the higher rate of relief available.

Both schemes allow relief to be claimed either in the tax year the investment is made or, by election, treated as made in the previous tax year. This is genuinely useful. It allows relief to be taken against a year in which you paid tax at a higher rate, or in which your income was unusually high, rather than against the current year by default.

It also means the decision does not have to be rushed to fit a tax year end, though in practice many offers close before 5 April for exactly that reason. The relief is claimed through Self Assessment once the company issues the EIS3 or SEIS3 certificate, which usually arrives some months after the investment.

Three risks matter more than the others. The first is total loss: these companies fail regularly, and the tax relief reduces the loss rather than preventing it. The second is illiquidity: there is generally no market for the shares, so you cannot sell when you want to, and the three-year minimum is often academic because there is no buyer at year four either. The third is that the reliefs depend on the company continuing to qualify — if it loses qualifying status within three years, the relief can be withdrawn even though you did nothing wrong.

There is also a protection point worth understanding. The Financial Services Compensation Scheme covers investments up to £85,000 per eligible person per firm where a regulated firm fails, but it does not cover investment losses — an EIS company failing is not an FSCS claim. Our article on FSCS protection sets out what is and is not covered. Concentration is the practical answer to some of this: spreading across several companies rather than backing one is the norm, and our article on investment risk covers why that matters.

Venture capital trusts invest in a similar type of company but are structured as listed investment companies, so an investor buys a diversified portfolio rather than shares in a single business, and the shares are usually easier to sell. The relief rate and holding period differ. Our article on venture capital trusts sets out the current terms.

The broad trade-off is that VCTs offer diversification and liquidity at a lower relief rate, while EIS and SEIS offer higher relief and additional capital gains treatment in exchange for single-company risk and illiquidity. Which is appropriate depends far more on your capacity for loss than on the headline relief.