EIS, SEIS and VCT Explained: Exemptions and Reliefs

For ambitious investors exploring tax-efficient investment opportunities, or entrepreneurs looking to raise valuable capital, several schemes are available. These schemes encourage investment in possibly higher-risk, smaller UK firms by providing considerable tax reliefs, with the aim being to significantly improve returns.

Three of these schemes are worth highlighting, namely:

1. Enterprise Investment Scheme (EIS) 
2. Seed Enterprise Investment Scheme (SEIS)
3. Venture Capital Trusts (VCT) 

At Hamlyns, we regularly advise entrepreneurs and investors on these government-backed investment structures, helping them understand the eligibility criteria and available tax benefits to them. This guide is here to break down the key points of difference between these three schemes, to help you identify which option may be best suited to you.

Understanding EIS, SEIS and VCT

All three schemes share a common objective: encouraging investment into small UK businesses by extending tax reliefs to individual investors. Each scheme, however, targets small enterprises at different stages of their growth journey, maintaining distinct, unique tax benefits.

In simple terms:

1. EIS supports investment in established companies, but that are relatively early-on in their journey.
2. SEIS explicitly targets brand-new startup firms in their first two years of inception.
3. VCT offers a share-buying scheme for investors, via listed investment trusts, which then diversifies across multiple qualifying companies. The risk is spread and individually minimised through professional fund management.

Key Tax Reliefs Explained

Income Tax Relief

All three schemes offer upfront income tax relief, though at different rates.

• EIS – 30% income tax relief on investments up to £1 million per tax year (or £2 million if at least £1 million is invested in knowledge-intensive companies)
• SEIS – 50% income tax relief on investments up to £200,000 annually, providing a maximum tax reduction of £100,000
• VCT – 30% income tax relief on investments up to £200,000 per tax year, capping maximum relief at £60,000 annually.

All three schemes also allow investors to carry back relief to the previous tax year, subject to annual limits.

Capital Gains Tax (CGT) Exemptions

One of the most attractive features of these schemes is the available CGT relief.

• EIS and SEIS shares (held for at minimum three years) qualify for complete CGT exemption on disposal, provided income tax relief was claimed and not withdrawn.
• VCT shares qualify for CGT exemption on disposal with no minimum holding period required, though income tax relief requires shares to be held for five years.
• EIS also offers CGT deferral relief, meaning investors can defer gains by reinvesting proceeds into EIS shares within the permitted timeframe (one year before to three years after the original gain arose).
• SEIS offers an additional 50% CGT exemption on gains from other assets reinvested into SEIS shares.

Loss Relief

EIS and SEIS provide valuable downside protection through loss relief. If investments fail, investors can claim income tax relief on capital losses (after deducting any income tax relief not withdrawn). For higher-rate taxpayers, this can recover up to 45% of net losses, substantially reducing actual investment risk.

VCT doesn’t offer any such equivalent loss relief, making it less attractive for investors seeking downside protection.

Inheritance Tax (IHT) Relief

EIS and SEIS shares can qualify for 100% Business Property Relief for inheritance tax purposes, after being held for two years and provided that the shares meet qualifying conditions.

VCT shares don’t qualify for inheritance tax relief, which is an important consideration for estate planning.

Eligibility and Investment Limits

For investors

• All three schemes are available only to UK residents aged 18 or over
• Companies, trusts and other entities cannot claim the tax relief
• Investors must not be ‘connected’ with the company (generally meaning they can’t own over 30% of share capital or be direct employees)*

*Directors can invest under certain circumstances, particularly in EIS.

For businesses

• Qualifying companies must be unquoted UK trading companies
• The maximum total employee numbers must be 249 (for EIS/VCT) and 25 (for SEIS)
• Gross assets must not exceed £15 million (for EIS/VCT) or £350,000 (for SEIS) before investment
• SEIS-backed businesses must raise no more than £250,000 through the scheme, while EIS companies can raise up to £5 million each year, with a £15 million lifetime limit
• Certain business activities are excluded, like property development, financial services, commodity trading, and so on.
• EIS and SEIS shares must be held for at least three years to retain income tax relief, and VCT shares for five years.

How to Claim Reliefs

Relief is claimed through Self-Assessment tax returns after receiving certification from the company (EIS3 forms for EIS/SEIS, or VCT certificates).

Companies cannot issue certificates until trading for at least four months.

Which Scheme is Right for You?

If you’re an investor comfortable with early-stage risks, looking for the maximum amount of tax relief upfront and are passionate about supporting brand-new businesses, then SEIS is probably best for you. The 50% income tax relief and additional CGT exemptions are compelling, despite the higher commensurate risk.

EIS balances compelling tax reliefs (including loss relief and CGT deferral options) with more measured risk, given eligible companies are more established. It’s probably best suited to investors looking for growth capital opportunities with meaningful tax benefits and downside protection.

VCT offers enticing diversification options via professional fund management, ideal for investors looking to spread risk across multiple firms. The tax-free dividends and five-year CGT exemption (with no minimum holding period for disposal relief) provide liquidity advantages, despite having no IHT benefits or loss relief.

How Hamlyns Can Help

Understanding the risks that come with EIS, SEIS, and VCT investments is important, and deciding on the best course of action requires a careful review of many factors. Your tax position, investment objectives, risk tolerance, and estate planning goals all need heavy consideration before you invest your hard-earned money.

At Hamlyns, our experienced, professional chartered accountants combine investment tax planning expertise with practical business insight to help you:

• Assess which schemes align with your circumstances
• Calculate potential tax reliefs and net investment costs
• Ensure compliance with HMRC claim procedures and timeframes
• Integrate tax-efficient investments into broader financial planning
• Understand qualifying company criteria if you’re raising capital

These schemes offer some of the UK’s most generous tax incentives for investors willing to support entrepreneurial businesses. With proper planning and expert guidance, they can enhance returns significantly whilst contributing to a vital segment of the UK economy. Contact Hamlyns today to discuss how EIS, SEIS, or VCT investments could benefit your tax and investment strategy.