Comparison of EIS, SEIS and VCT

20 January 2024 / Insight posted in Practical guides

Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS) and Venture Capital Trusts (VCT) are three types of government-backed schemes that aim to encourage investment in small, unquoted companies that are generally perceived to be high-risk investments. Here, we go through what they are and who may consider them.

What is EIS, SEIS or VCT?

EIS and VCT have traditionally been grouped together as they both incentivise investment in small, unquoted companies. SEIS is more suited to investment in new start-up companies. All have certain legislative features in common, including all being considered high-risk. They can also all be illiquid.

EIS, SEIS and VCT funds typically invest in private or AIM-quoted companies, as opposed to companies listed on the London Stock Exchange. This is because these stocks are considered to be more volatile than larger, listed companies. Because of the volatile stocks, generous tax reliefs are often offered to investors.

Key EIS conditions

For an investment to qualify under EIS, the company and the investor need to meet certain conditions.

EIS conditions to be met by the company

The company’s gross assets must not exceed £15 million immediately before the shares are issued and £16 million immediately afterwards;
The company must be unquoted and have a UK permanent establishment;
The company (or a member of its group) must exist to carry on a qualifying trade (with certain activities – including various financial activities, property development, legal and accounting services, and hotels – being “excluded”);
The company must not be under the control of another company;
The number of full-time employees of the company must not exceed 250 (or 500 for “knowledge-intensive” companies); and
In addition, the company must intend to grow and develop its trade in the long term, and there must be a significant risk to the investor that there will be a loss of capital in excess of the amount of net investment return.

The maximum annual amount that can be invested in a company through schemes such as EIS is £5m (£10m for knowledge-intensive companies), and the maximum total amount that a company can raise through these schemes is £12m (£20m for “knowledge-intensive companies”).

A company must normally raise its first EIS investment within seven years of its first commercial sale. EIS funds must be raised for the purpose of business growth and development, and they must generally be used for the purpose of a qualifying trade within two years.

EIS conditions to be met by the investor

The investor must subscribe for new non-redeemable ordinary shares and these need to be fully paid up in cash when issued; and
The investor must not be “connected” with the company, which in brief means that they must not own more than 30% of the company or be an employee or director of the company (although there are certain exceptions in the case of directors).

Key SEIS conditions

For an investment to qualify under SEIS, the company and the investor need to meet certain conditions which are in many respects similar to those that apply under SEIS.

SEIS conditions to be met by the company

The company’s gross assets must not exceed £350,000 before the investment (increased from £200,000 from 6 April 2023);
The company must be unquoted and have a UK permanent establishment;

The company (or a member of its group) must exist to carry on a qualifying trade (with the same “excluded” activities as for EIS), and any trade carried on at the date of issue must be less than three years old (two years for shares issued before 6 April 2023);

The company must not be under the control of another company;
The number of full-time employees of the company must not exceed 25;
The company must not previously have had any investment from a VCT, or any investment that qualifies for EIS; and

In addition, the company must intend to grow and develop its trade in the long term, and there must be a significant risk to the investor that there will be a loss of capital in excess of the amount of net investment return.

The maximum total amount that can be raised by a company under SEIS is £250,000. The money must be raised for a qualifying trade that is, or is going to be, carried on by the company.

SEIS conditions to be met by the investor

The investor must subscribe for new non-redeemable ordinary shares and these need to be fully paid up in cash when issued;
The investor can be a director of the company, but otherwise cannot be an employee; and
The investor must not own more than 30% of the company.

Key VCT conditions

A VCT is a quoted investment company which must meet various conditions. These include the fact that at least 70% of its investments must be in “qualifying investments”, which are broadly in the types of company that might qualify for EIS investment. No more than 15% of the VCT’s investments can be in any one company, and a least 85% of its income must be distributed each year.

Comparing EIS, SEIS and VCT

Our downloadable document summarises the main requirements of the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT) as well as the tax benefits for the individual investor of each scheme.

In the document, we compare the schemes by analysing: