Seed Enterprise Investment Scheme (SEIS) & Enterprise Investment Scheme (EIS)

Seed Enterprise Investment Scheme & Enterprise Investment SchemeIntroduction to SEIS

The Seed Enterprise Investment Scheme, also known as SEIS, offers great tax efficient benefits to individuals while also encouraging investing in small and early stage start-up businesses in the UK. The SEIS was designed to boost economic growth in the UK by promoting new enterprise and entrepreneurship.

Important Points about SEIS

  • SEIS investors can input £100,000 in a single tax year, which can be spread over a number of companies. Any one company can raise no more than £150,000 in total via SEIS investment.
  • Investors cannot control the company receiving their capital and cannot have more than a 30% stake in the company in which they invest.
  • Investors can receive up to 50% tax relief in the tax year the investment is made, regardless of their marginal rate of income tax.
  • The business company must be a UK company and have a permanent establishment in the UK.
  • In the 2014-15 tax year, tax payers can roll a chargeable gain on the disposal of assets in the tax year in to shares qualifying for SEIS income tax relief, with a full capital gains tax exemption.
  • The company must have fewer than 25 employees. If the company is the parent company of a group, that figure applies to the whole group.
  • The company’s trade must be no more than two years old.
  • The company must have assets of less than £200,000.
  • The company has to trade in an approved sector – generally not in finance or investment, for example, a property company cannot raise capital as SEIS.

Introduction to EIS

The Enterprise Investment Scheme (EIS) is a series of UK tax reliefs designed to encourage investments in small companies carrying on a qualifying trade in the United Kingdom. This scheme follows on from the SEIS (when a business is looking to raise further capital once the seed investment has been utilized already). Investment in companies that are not listed on a stock exchange often carries a high risk. The tax relief is intended to offer some compensation for that risk. The EIS offers both income tax and capital gains tax reliefs to investors who subscribe for shares in qualifying companies.

Important Points about EIS

  • An investor with no more than a 30% interest in the company can reduce his/her income tax liability by an amount equal to 30% of the share subscription. The maximum subscription per investor is currently £1,000,000 per annum, yielding a potential reduction in tax liability of £300,000 per annum (assuming the investor has sufficient income tax liability).
  • Investors cannot control the company receiving their capital and cannot have more than a 30% stake in the company in which they invest.
  • The company must not have assets greater than £15 million.
  • Deferral of gains realised on a different asset, where disposal of that asset was less than 12 months before the EIS investment or less than 36 months after it. This relief is limited to the amount being invested into the EIS and can be claimed by investors whose interest in the company exceeds 30%. It is available to individuals and trustees. Where gains arise on the EIS investment, taper relief is available. Note that deferral of gains is no longer available by investing in VCTs.
  • No capital gains tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.
  • If EIS shares are disposed of at any time at a loss, such loss can be set against the investor’s capital gains or his income in the year of disposal.
  • EIS Investments are exempt from inheritance tax after two years of holding such investment subject to the Company being allowable under Business Property Relief (BPR).
  • All capital employed must be actively engaged in the company within 24 months.

Useful Links

You can find more important information about SEIS and EIS on the HM Revenues & Customs – Investment Schemes page.

Soichiro Honda – A Short Entrepreneurial Film

Soichiro Honda was a Japanese engineer and industrialist. In 1948, he established Honda and oversaw its expansion from a wooden shack manufacturing bicycle motors to a multinational automobile and motorcycle manufacturer.

Honda was born in Tenryū, Shizuoka, a small village under Mount Fuji near Hamamatsu on November 17, 1906. He spent his early childhood helping his father, Gihei, a blacksmith, with his bicycle repair business. At the time his mother, Mika, was a weaver. Honda was not interested in traditional education, his school handed grade reports to the children, but required that it will be returned stamped with the family seal, to make sure that a parent had seen it. Soichiro created a stamp to forge his family seal out of a used rubber bicycle pedal cover. The fraud was soon discovered when Honda started to make forged stamps for other children. Honda did not realize that the stamp had to be mirror-imaged. His family name was symmetrical when written vertically, so it did not cause a problem, but some of other children’s family names were not.

Even as a toddler Honda had been thrilled by the first car that was ever seen in his village and often used to say in later life that he could never forget the smell of oil it gave off. Soichiro once borrowed one of his father’s bicycles to see a demonstration of an airplane made by pilot Art Smith, which cemented his love for machinery and invention.

At 15, without any formal education, Honda left home and headed to Tokyo to look for work. He obtained an apprenticeship at a garage in 1922, and after some hesitation over his employment, he stayed for six years, working as a car mechanic before returning home to start his own auto repair business in 1928 at the age of 22.

What is Diversification?

DiversificationDiversification is the strategy of investing in assets that are uncorrelated to one another. This simply means choosing assets whose values do not move in the same direction – up or down. Diversification allows investors to minimise their potential losses by not putting all their eggs into one basket. However, does diversification mean that investors should put each egg into a different basket and have hundreds of baskets to look after? Do you believe that you are over-diversified? There are three signs of over-diversification:

  1. Expenses – Regardless of whether an investor is diversified across various assets, such as real estate, stocks, bonds or alternative investments (such as art), expenses will likely rise simply based on the actual number of investments. Have you calculated your fees, charges and costs?
  2. Balancing – Having a diversified portfolio may mean that you have to be more involved in and/or knowledgeable about your investment choices. Are you aware of your investments to an in-depth level?
  3. Underperformance – Great investment returns require choosing the right investments at the correct time and having the courage to put a large portion of your investable funds toward them. Are you confident about being able to do this?

At the end of the day, having a diversified portfolio, perhaps one managed by a professional, may make sense for many people. However, beware, this approach is not without specific risks, such as higher overall costs, more accounting for and tracking of investments, and most importantly, potential risk of significant underperformance.

An Inspirational Philanthropist – Warren Buffett

Warren BuffettWarren Buffett is an American business magnate, investor and philanthropist, better known for his role as chairman, CEO and largest shareholder of Berkshire Hathaway. This article highlights how much importance Buffett places to philanthropy in his life.

Buffett says that he doesn’t have a problem with guilt about money. The way he sees it is that his money represents an enormous number of claim checks on society. If Buffett wanted to, he could hire 10,000 people to do nothing but paint his picture every day for the rest of his life. And the GDP would go up. But the utility of the product would be zilch, and he would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. He doesn’t use very many of those claim checks. There’s nothing material that he wants very much. Therefore, Buffett is going to give virtually all of those claim checks to charity when him and his wife, Susan Buffett die.

Buffett decided to give his Berkshire Hathaway stocks to philanthropic foundations including the Gates Foundation. He believes that he has enough money to take his family on holiday, for entertainment purposes and educating his children, so he will never have to make any sacrifices. The USD 58.5 billion billionaire still lives in a 3-bedroom house in mid-town Omaha that he bought over 50 years ago. And he still drives his own car himself.

Furthermore, Buffett quoted that he will annually distribute about 4% of the shares of Berkshire Hathaway that he retains so that those who are in need of the money will receive the maximum amount. He will continue giving money to different charities through his own goodness, and has asked many rich Americans to pledge at least 50% of their wealth to different charities.