SEIS and EIS: concise UK guide to investor tax relief for startup founders

SEIS/EIS Tax Relief: A Founder's Guide to UK Investor Incentives

For UK startups raising their first significant funding, the conversation inevitably turns to SEIS and EIS. These government schemes are not just tax jargon; they are powerful incentives that can make or break an early-stage funding round. For founders learning how to qualify for SEIS EIS tax relief, understanding the rules is fundamental. Investors, particularly angels, often see SEIS/EIS eligibility as a non-negotiable prerequisite, making it a critical part of your fundraising strategy. Getting this right signals competence and de-risks the opportunity for backers, while getting it wrong can stall momentum. This guide provides a practical walkthrough for securing the investor tax incentives UK angels expect.

Understanding SEIS & EIS: Two Tiers of the Same Scheme

The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are not separate programmes but two tiers of the same powerful scheme. Both are designed to encourage investment into high-risk, early-stage UK companies by offering significant tax relief to investors.

SEIS is designed for the very beginning of a company's life. As its name suggests, it applies to your first seed funding. The key limit to remember is that "SEIS (Seed Enterprise Investment Scheme) is for the first £250,000 a company raises." The incentive for investors is substantial; "under SEIS, investors can claim back 50% of their investment as income tax relief." This high level of relief makes your proposition significantly more attractive to early backers.

Once a company has raised its initial SEIS funding or outgrown the scheme's limits, it graduates to EIS. This tier supports a company’s growth phase. The scale is much larger, as "EIS (Enterprise Investment Scheme) is for up to £12 million in lifetime funding for a company." The corresponding tax relief for investors is lower but still very compelling: "under EIS, investors can claim back 30% of their investment as income tax relief." Understanding this two-tier structure is the first step in mastering the SEIS/EIS application process.

Step 1: Confirming Eligibility – How to Qualify for SEIS/EIS Tax Relief

Before you approach investors, you must determine if your company meets HMRC's strict eligibility criteria. Misinterpreting these rules is a common pitfall that can lead to promising investors relief they can never claim. Think of this as your pre-flight check; getting it right now prevents significant problems later. For most early-stage startups, this means building your fundraising strategy around these rules from day one.

Here is a checklist covering the core SEIS and EIS eligibility criteria:

• Company Age: Your trading history is a primary factor. "To be SEIS eligible, the company must have been trading for less than 3 years." For the next stage, "to be EIS eligible, it's generally less than 7 years since the company's first commercial sale." Note that for R&D-heavy startups, "Knowledge-Intensive Company (KIC) rules can sometimes extend the EIS eligibility window."
• Company Size: HMRC imposes limits on your team size. The "SEIS size limit: fewer than 25 employees." For growth rounds, the "EIS size limit: fewer than 250 employees."
• Gross Assets: The value of your company's assets before investment is also capped. The "SEIS gross assets limit: under £350,000 before the investment." This increases significantly for the next stage, with the "EIS gross assets limit: under £15M before the investment."
• UK Presence: This is a UK-specific scheme. Your "company must have a permanent establishment in the UK."
• Independence: You cannot be a subsidiary. Your "company must not be controlled by another company."
• Qualifying Trade: Not all business activities are eligible. HMRC maintains a list of "excluded activities include property development, finance, legal services, and energy generation." This is particularly relevant for startups in fintech or professional services, who must ensure their core business model qualifies.

Step 2: Getting the Green Light with Advance Assurance

Once you have confirmed your eligibility, the next step is proving it to investors. This is achieved through Advance Assurance (AA), a formal process where you ask HMRC to confirm, in principle, that an investment in your company would qualify for SEIS or EIS. While technically optional, most experienced UK angel investors will not invest without it.

Skipping this step can stall your funding round just as it’s gaining momentum. Investors need confidence that the promised tax relief is secure. The good news is that "Advance Assurance (AA) is a free service from HMRC." The process involves submitting your business plan, financial forecasts, and details of your proposed share issue. HMRC then reviews your application to ensure it meets all technical requirements.

It’s crucial to understand the distinction between HMRC’s assessment and an investor’s. HMRC’s focus is purely technical: does your company structure, trade, and age fit the rules? They are not evaluating your business's potential for success. An investor, on the other hand, relies on HMRC for the technical green light but bases their final decision on your team, market, and product. Securing AA clears the first hurdle and allows investors to focus on the business itself.

Step 3: Structuring Startup Funding Rounds to Maximise Benefits

Founders often ask how to handle a funding round that exceeds the SEIS limit. For example, how do you structure a £500k round when SEIS only covers the first £250,000? This requires careful planning and clear communication with investors.

In this scenario, you structure the round to use both schemes. The first £250,000 of investment received is allocated under SEIS, and the subsequent £250,000 falls under EIS. You must manage this process meticulously on a first-come, first-served basis. You cannot pick and choose which investors get SEIS; it is strictly based on the order in which the company receives the investment funds.

Consider a SaaS startup raising £500,000. The investors whose funds arrive first, up to a cumulative total of £250,000, are designated as SEIS investors. Any investor whose funds arrive after that threshold is crossed will be an EIS investor. This must be clearly documented in your subscription agreements and shareholder records.

Clarity is key. You must inform investors which scheme their investment falls under, as it directly impacts their potential tax relief (50% for SEIS vs. 30% for EIS). This transparency builds trust and prevents misunderstandings later.

Step 4: Delivering on the Promise with Post-Investment Compliance

Securing investment is a milestone, but your responsibilities for SEIS/EIS are not over. Inadequate post-investment compliance is a critical error that can jeopardise your investors' tax relief. The money is in the bank; now you must follow HMRC’s process to allow investors to make their claims. This is the non-negotiable final step.

First, the funds must be used for a qualifying business purpose. HMRC states that "post-investment, at least 70% of the funds raised must be spent on the qualifying business activity." You cannot, for instance, use the money to acquire another business or lend it out.

Next comes the formal compliance filing. After the investment round closes, you submit a compliance statement to HMRC, known as form SEIS1 or EIS1. The timing for this is specific: "a compliance statement (form SEIS1/EIS1) is submitted to HMRC after the company has been trading for 4 months or has spent 70% of the funds." After reviewing and approving your statement, "HMRC issues a Unique Investment Reference (UIR) after approving the SEIS1/EIS1 form."

This UIR is the key to completing the process. "The UIR is used to generate SEIS3/EIS3 compliance certificates for investors." These certificates are the official documents your investors need to claim their tax relief. The entire process, from round close to an investor receiving their certificate, typically takes five to six months. It’s vital to manage this timeline and keep your investors informed.

Conclusion: A Strategic Approach to SEIS and EIS

Navigating SEIS/EIS tax relief is a foundational skill for UK founders. It is a strategic tool, not an administrative burden. The process requires careful attention to detail, but the payoff in attracting UK startup investment tax relief is immense. To succeed, perform your eligibility pre-flight check diligently before engaging investors. Use the free Advance Assurance service from HMRC to build investor confidence. If your round exceeds the £250,000 SEIS limit, structure it clearly so investors understand their position. Finally, remember that post-investment compliance is not optional. Timely filing is essential to deliver the promised tax relief to the backers who have shown faith in your vision. For related guidance on compensation and tax strategy, see our guides on tax-efficient founder compensation and the Tax Strategy hub.

Frequently Asked Questions

Q: What happens if a company fails after receiving SEIS/EIS investment?
A: Investors can still benefit. If they sell their shares at a loss, they can offset this against their income tax or capital gains tax. This "loss relief" is a key feature of the schemes, further reducing the financial risk of investing in early-stage, high-risk companies.

Q: Can founders or their family members claim SEIS/EIS tax relief?
A: Generally, no. Founders, employees, and their associates (like spouses or parents) are typically not eligible to claim SEIS or EIS relief on their own company's shares. The schemes are designed to attract external, independent investment, not to provide tax breaks for existing connections.

Q: How long must an investor hold their shares to keep the tax relief?
A: To retain the full income tax relief, an investor must hold their SEIS or EIS shares for a minimum of three years from the date of issue. If the shares are sold or disposed of before this three-year period, HMRC may require the investor to repay some or all of the tax relief claimed.