Some information on SEIS and EIS Funds- how do they work?
SEIS and EIS are no strangers to Investments funds but how do these work?
When starting up in business, the most daunting task and biggest challenge is raising funds. There are many ways a new entrepreneur may seek financing, for example through bank loans and credit cards, but these can be difficult to access due to bad credit, lack of credit or for the simple fact any new business is seen as a potential risk. So with financing now being harder to access, new businesses are looking to Angel investors more than ever. The way it normally works is an Angel investor buys shares in a emerging business at a low value with the long term view that this will grow. This means that later on, if they sell their shares, they will get a bigger return on their investment.
Thankfully the increase in Angel Investors has now been acknowledged by the UK Government as they see the importance of Business Angels to small businesses’ growth and introduced the Enterprise Investment Scheme (EIS) in 1994. EIS was conceived to encourage individuals to buy and hold new shares for at least 3 years by minimising the risks of early stage investments. With this scheme, if an individual decides to buy shares in an EIS qualified company, they would be entitled to claim 30% back of their investment through income tax relief as well as other tax benefits such as a capital gains tax exemption – if the investment returns a profit – or a loss relief – if the company unfortunately fails.
Following the success of EIS, the UK introduced the Seed Enterprise Investment Scheme (SEIS) in 2012. This new program supports the most early-stage companies’ development by providing investors with more generous tax benefits when compared to EIS. SEIS offers 50% of an investment back through income tax relief alongside further tax benefits to individuals who buy shares in SEIS qualifying companies. Although the SEIS and EIS schemes were originally designed for individual investors, asset managers spotted the opportunity to encourage passive investors to support early-stage companies by developing SEIS and EIS funds. These funds are designed for investors who are willing to buy risky and liquid assets, are eligible to claim the tax benefits, but do not have the time or expertise to select emerging companies. Today, there are over 30 SEIS and EIS funds operating in the UK across various sectors such as life sciences, digital technology, or media and gaming.
Asset Managers normally raise money from SEIS and EIS funds from private investors, these managers do this by utilising their expertise to screen and select most promising SEIS and EIS. Once startup is selected such managers then manage the whole process. Once such investments are completed, investors receive SEIS and EIS certificates corresponding to the underlying fund investments so that they can claim their tax benefits.
As well as the tax benefits, time saving and expertise there are many other advantages to using SEIS and EIS funds for investors, one of the biggest being the diversification effect. Expert Asset managers usually select 5 to 15 companies per investment brief. This allows the investment risk to be spread across a broader portfolio of companies than the one an individual would have achieved by investing directly in companies.