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SEIS/EIS loss relief in insolvency and liquidation
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What is SEIS/EIS loss relief and when can I make a claim?
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) provide tax relief when investing in eligible early-stage and growing companies. Investing in private companies is inherently risky, so these tax reliefs exist to increase the financial rewards and encourage investment.
The key difference between the two schemes is the SEIS is aimed at start-ups and very early-stage businesses, while the EIS encourages investment in more established companies that are further along in their journey.
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Companies can qualify for the EIS and SEIS schemes if they have a permanent base in the UK and conduct significant levels of business here. They must also be private companies (not traded on the stock exchange) and not control or be controlled by another company.
There are also a few specific requirements companies must meet to be eligible for each scheme:
- Companies must have less than £200,000 in gross assets to qualify for the SEIS and under £15 million in assets for the EIS.
- Companies must have fewer than 25 employees for the SEIS and not more than 250 employees for the EIS.
- SEIS-qualifying companies must not have been trading for more than two years; it’s seven years for the EIS.
You can invest up to £200,000 per tax year in an SEIS-qualifying company and receive a 50% Income Tax break in return. You’ll also get a Captial Gains Tax exemption on any profits you make from the sale of shares you keep for at least three years.
With the EIS, you’ll receive a 30% Income Tax break on qualifying investments of up to £1 million per tax year. And like the SEIS, you’ll pay no Capital Gains Tax on the profits from shares you sell at least three years after their issue date.
Although your initial focus will be on the Income Tax relief you receive when you make a qualifying investment, you’ll also receive a tax break, known as loss relief, to reduce your financial losses if the company underperforms.
If you buy a stake in a SEIS or EIS company and sell the shares at a loss or the business fails, you can offset that loss against your Income Tax or Capital Gains Tax bill. The value of the relief will be between 20% and 45% off your loss, depending on your tax rate.
If the value of your investment when you sell shares falls below the amount you invested minus the tax relief you claimed previously, you could be eligible for loss relief.
You can claim loss relief to offset your tax bill for the year you incur the loss or the previous year. The deduction you’ll receive is equal to your Income Tax or Capital Gains Tax rate, so if you pay tax at the higher rate, you’ll receive loss relief of 40% or 20% respectively.
As well as selling shares at a loss, investors qualify for SEIS or EIS loss relief if the company they invest in is dissolved or liquidated for genuine commercial reasons, the most common being that the company is insolvent.
You will not be eligible for loss relief if the company is dissolved or wound up for anything other than genuine commercial reasons.
Here are a couple of quick examples:
You invest £50,000 in an EIS-qualifying business. You can claim 30% Income Tax relief on that investment, which is £15,000. That means only £35,000 of your investment is at risk. If the company fails and is liquidated, assuming you pay the higher rate of Income Tax at 40%, your loss relief will be worth 40% of £35,000, which is £14,000.
Alternatively, if you invest £100,000 in an SEIS-qualifying business, you can claim 50% Income Tax relief, which is £50,000. That means only £50,000 of your investment is at risk. If the company fails and is liquidated, assuming you pay the higher rate of Income Tax at 40%, your loss relief will be worth 40% of £50,000, which is £20,000.
You can claim loss relief on an SEIS or EIS-qualifying investment when submitting your self-assessment tax return for the year you incurred the loss or the year after. For example, if you made the loss in the 2022/23 yax year, you would need to claim by 31st January 2025.
You can use the ‘Unlisted shared and securities’ section of form SA108 to claim SEIS/EIS losses. You’ll need to specify the year you made the loss, the source of the loss and the year(s) you want to apply the loss to.
You can choose whether to receive the relief as a deduction from your Income Tax or Capital Gains Tax bill. If you claim the relief as an Income Tax deduction, you can specify whether to receive the relief for the year of the loss or the previous tax year. You can also claim the relief for both years if you don’t have sufficient taxable income in a single year.
If you claim the relief as a Capital Gains Tax deduction, you can choose to offset your Capital Gains Tax for the current or future tax years.
If you want specific business debt advice or are worried about the implications of insolvency for a business you have invested in, please contact our team. We offer a free, same-day consultation or you can arrange a free face-to-face meeting at one of our 100+ offices across the UK.
Further Reading on SEIS/EIS loss relief in insolvency and liquidation
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