As we explained in our previous blog post, What is an angel investor?, business angels usually invest in early-stage companies. By doing so they take on a high level of risk.
There are ways, however, of reducing the risk – through a diversified investment portfolio and syndication, for example. Another significant way is by taking advantage of the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS).
As it’s the 25th anniversary of EIS, we wanted to highlight the importance of this initiative and its derivative scheme SEIS.
These are two very attractive tax relief schemes that were set up by the UK government to mitigate the risk and incentivise start-up investment for angels who pay tax in the UK. (For an overview of the tax reliefs available through these schemes, and who qualifies, visit the UKBAA website.)
We spoke to business angel Patrick Nash to get his thoughts on just how much EIS and SEIS can really benefit investors.
Patrick has established and led twelve charities, social enterprises and values-driven businesses. His last company, Connect Assist, provides dedicated helplines and digital services to public and third sector organisations, including the Royal British Legion and Barnardo’s.
Q.) When did you start angel investing?
A.) I began angel investing two years ago, with a particular interest in health technology. Angels Invest Wales introduced me to two investment opportunities in this space - both were businesses that qualified for SEIS.
Q.) What’s the difference between EIS and SEIS?
A.) EIS is designed for investment in early-stage businesses. SEIS is designed for investment in very early seed or start-up stage businesses, and offers even greater income tax relief (50%, whereas EIS is 30%).
Q.) How do the tax reliefs benefit angel investors?
A.) Investing in new businesses is a risky venture. The tax reliefs are significant and make it much more attractive to investors.
With the SEIS income tax relief you get half of your investment back. You also don’t have to pay Capital Gains Tax on any gains made when you sell your shares after three years. And another important aspect, which hopefully I’ll never have to use, is loss relief. If the business you invest in fails and you sell your shares at a loss at any time, you can choose to offset the loss against your income tax rather than capital gains tax. This can limit the total loss.
So, whether your investment increases in value, stays the same, or decreases in value, the scheme helps to protect your initial investment, increasing your gains or reducing your losses.
Below are two tables showing how EIS and SEIS can benefit an investor in three different scenarios. Please note these are for illustration only; tax benefits depend on individual circumstances and may change.
EIS
|
|
Scenario 1: Investment falls in value to zero
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Scenario 2: Investment stays the same value
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Scenario 3: Investment triples in value
|
|
Initial investment
|
£10,000
|
£10,000
|
£10,000
|
|
Investment value after three years
|
£0
|
£10,000
|
£30,000
|
|
Income tax relief
|
£3,000 (30%)
|
£3,000 (30%)
|
£3,000 (£30%)
|
|
Capital Gains Tax
|
£0
|
£0
|
£0
|
|
Loss relief (assuming rate of income tax is 45%)
|
£3,150 (45% of £7,000)
|
n/a
|
n/a
|
|
Total returns
|
£6,150
|
£13,000
|
£33,000
|
|
Total gains/losses
|
-£3,850
|
+£3,000
|
+£23,000
|
SEIS
|
|
Scenario 1: Investment falls in value to zero
|
Scenario 2: Investment stays the same value
|
Scenario 3: Investment triples in value
|
|
Initial investment
|
£10,000
|
£10,000
|
£10,000
|
|
Investment value after three years
|
£0
|
£10,000
|
£30,000
|
|
Income tax relief
|
£5,000 (50%)
|
£5,000 (50%)
|
£5,000 (£50%)
|
|
Capital Gains Tax
|
£0
|
£0
|
£0
|
|
Loss relief (assuming rate of income tax is 45%)
|
£2,250 (45% of £5,000)
|
n/a
|
n/a
|
|
Total returns
|
£7,250
|
£15,000
|
£35,000
|
|
Total gains/losses
|
-£2,750
|
+£5,000
|
+£25,000
|
Q.) Are the tax reliefs the main reason you invest in early stage businesses?
A.) I like early-stage businesses, and the tax reliefs aren’t the main reason for investing in them, but they are essential due to the high-risk nature of this type of investment. I don’t know if I’d have made those investments without SEIS, and going forward I wouldn’t invest if a business wasn’t registered for the scheme.
Q.) Would you recommend the scheme to other investors?
A.) Yes, I would totally recommend it. Any investor is looking to minimise risk; this is crucial in any investment strategy. The EIS and SEIS schemes are one of the best ways of doing this. You’re also more prepared to make bigger investments on the back of these tax reliefs.
Angels Invest Wales
Are you interested in investing your wealth in a tax-efficient way while supporting some of Wales’s most exciting businesses? If so, get in touch with us at Angels Invest Wales.
We connect experienced investors with Welsh businesses seeking private investment through our digital platform. Investors have easy access to a range of carefully selected and ‘quality controlled’ investment opportunities.
Syndicates of investors (managed by a pre-approved lead investor) can apply for co-investment from our £8 million Wales Angel Co-investment Fund. As co-investor we can contribute up to 50% of the total deal.
