SEIS and EIS loss relief: What is it and how can your investors claim it?

Startup not working out? Haven’t been able to raise investment? Here’s how to make sure your SEIS/EIS investors get the best outcome for supporting you on your journey.

Startup life can be tough and you’ll always have difficult choices to make. If your company isn’t profitable and can’t raise money, you have broadly three choices:

1. Sell the company
2. Go into zombie mode
3. Shut down

In this video and post, we look at how each of these three strategies affects loss relief for your SEIS/EIS investors, and how to give them the best outcome for supporting you on your journey.

Sell the company: how SEIS/EIS loss relief works

Selling your company is much easier said than done. It can be tricky to find a buyer but there are a growing number of platforms such as Foundy and Acquire which could help.

When you sell the company, you (the founders) and your investors sell shares to the new owner. Under the SEIS/EIS rules, if your SEIS/EIS investors had their shares for more than three years, they pay no Capital Gains Tax (CGT) when they sell their shares.

But that’s only relevant if they sell the shares for more than they paid for them. If the investors sell the shares for less than they paid for them, they might be eligible for SEIS/EIS loss relief, regardless of how long they’ve held the shares.

The amount of tax relief your SEIS/EIS investors can claim will depend on what Income Tax relief they received when they bought the shares and whether HMRC has withdrawn any of their Income Tax relief.

Example

You raised investment two years ago at a £2 million valuation.
You’ve had an offer to buy the company and you sell for £500,000

The SEIS investors who invested in your company at the round two years ago get back less than their investment but they can tax deduct the loss.

Have a look at the example on the gov.uk website to see how the SEIS/EIS loss relief works with Income Tax relief.

Go into zombie mode: no EIS/SEIS loss relief

If you reduce burn to zero, your company won’t be productive or have any revenue. The company isn’t alive or dead but it’s still going. As we might insultingly call it, it’s a zombie.

This situation isn’t good for investors because they’ve put money in but their shares aren’t sold and they can’t claim loss relief.

But there’s always the possibility that you could revive the company in future. Maybe you’ll find more money from your own finances to fund it, or you’ll find another investor.

Put the company into voluntary liquidation: how EIS/SEIS loss relief works

Let’s assume your company doesn’t have creditors you can’t pay – if you do, you might need to do an involuntary insolvency.

If you can wind up your company voluntarily, your SEIS/EIS investors might be eligible for loss relief.

If your investors have held their shares for less than three years, HMRC would usually withdraw the Income Tax relief those investors received on their investment. But if you’re winding up the company for genuine commercial reasons – which HMRC defines as the company “is insolvent or is likely to become insolvent” – then HMRC are unlikely to withdraw the Income Tax relief.

To maximise the return for your investors – or minimise their loss – work with your accountant and Companies House to wind up the company, allowing your SEIS/EIS investors to claim loss relief.

How investors can claim SEIS/EIS loss relief

When you’re in the midst of the excitement of accepting an SEIS/EIS investment, it’s easy to focus on the immediate benefit for the investors: the Income Tax relief they get on the amount they invest. But another reason the Enterprise Investment Schemes are so popular is because investors can claim relief on losses, if they qualify.

If investors sell their SEIS/EIS shares at a loss, they can choose to offset the loss amount, minus any income tax relief they’ve already had from HMRC, against their income.

If the investor is claiming the loss for the current tax year, they can contact HMRC to request a change to their PAYE tax code or to make an adjustment to their Self Assessment tax payments.

If the investor is claiming the loss for the previous tax year, they’ll make the claim on their Self Assessment tax return. There are full details for your investors on how to claim SEIS/EIS loss relief at the gov.uk website.

Here’s a summary of how SEIS/EIS loss relief works for the three strategies we described above:

🤝 Sell the company

Is loss relief available?

• Yes, the investor can claim loss relief if they receive less for their shares than they paid for them.
• BUT… note that if the company is sold within 3 years of their investment, they will lose the original SEIS/EIS tax deduction that they had previously claimed and will need to repay that to HMRC. So they’ll lose their original SEIS/EIS tax deduction, but still be able to claim the usual loss relief when selling shares at a loss.

Conditions:

• SEIS/EIS investors qualify for loss relief if they sell their shares at a lower price than they paid.
• The loss relief depends on what Income Tax relief investors received when they bought the shares and whether HMRC has withdrawn any of their Income Tax relief.
• There’s no minimum or maximum time that the investors must have held their shares.

🧟 Go into zombie mode

Is loss relief available?

• No, because they’re still holding on to their shares, nothing has been sold.
• BUT… the investor may be able to make a negligible value claim and be able to claim a loss, even if still holding their shares.

🔚 Shut down (voluntary liquidation)

Is loss relief available?

• Yes

Conditions:

• SEIS/EIS investors might be eligible for loss relief if the company is voluntarily wound up for genuine commercial reasons.
• The loss relief depends on what Income Tax relief investors received when they bought the shares and whether HMRC has withdrawn any of their Income Tax relief.
• There’s no minimum or maximum time that the investors must have held their shares.

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