Starting a business can be hard. It often involves lots of late nights, working for no pay and using your own funds to pay for the things you can’t do yourself. By the time you’ve reached the point of needing a team around you to further develop an idea or launch a product, you probably need funding from outside sources too. Beyond venture capital and private equity investment, what are your options?
Read on to learn about other funding routes which you could use to interest friends, family and angel investors in backing your new business. We’ll also explore ways you can use shares to incentivise and retain key employees, rather than paying cash bonuses.
Making your shares more attractive for individual investors – The SEIS and EIS schemes
The Seed Enterprise Investment Scheme (SEIS), and Enterprise Investment Scheme (EIS), are tax advantaged share investment schemes for the investor. Wealthy individuals usually invest into the schemes to obtain immediate and future tax breaks.
Companies that use these schemes to raise capital are often seen as riskier investments: the investor might look at the company proposition and management team in deciding whether to make their investment.
Tax benefits of SEIS and EIS
Depending on the scheme, SEIS and EIS investors obtain a range of tax benefits:
| Area | SEIS | EIS |
| Income Tax (IT) saving in year of investment | 50% of the amount invested, up to £100,000 of IT relief | 30% of the amount invested, up to £300,000 of IT relief (increase for investment into knowledge intensive companies) |
| IT saving on future loss made on share sale | Additional IT relief can be obtained where shares have been sold at a loss | |
| Capital Gains Tax (CGT) on future profit on shares | None if the shares have been held for at least three years* | |
| Inheritance tax (IHT) on shares | Potentially no IHT arises if the shares have been held for two years and the company qualifies for IHT Business Property Relief | |
| Tax on dividends paid on the shares | IT at dividend tax rates applies to the dividends received | |
*This applies where full income tax relief has been obtained on the initial investment. Where the amount of income tax relief exceeds the total income tax payable, part of the gain made will be subject to CGT.
Qualifying for SEIS and EIS
Only certain qualifying companies are eligible to issue shares under the SEIS and EIS schemes. The conditions, for companies that are not defined as knowledge intensive companies (KICs) and for schemes implemented after 6 April 2023, are outlined below:
| Area | SEIS | EIS |
| Maximum investment per company | £250,000 | £12m in total for all schemes; £5m in a single year for all schemes |
| Maximum company age | Less than three years old, but the company must not have previously carried on a trade | Less than seven years old when the first investment is received. There is no time limit where follow-on funding is received from the initial EIS investment |
| Maximum number of full-time equivalent employees | Less than 25 employees | Less than 250 employees |
| Maximum gross assets on the balance sheet | £350,000 before the SEIS investment is received | £15m before, and £16m after, the EIS investment is made. |
| How the funds must be used | For a new qualifying trade* | For a qualifying trade* |
| Investment by directors | Paid directors can invest | Paid directors cannot invest, subject to special rules for directors whose entitlement to receive remuneration starts after the acquisition of the shares |
*For these purposes, a qualifying trade is one which is conducted on a commercial basis and with a view to a realisation of profits. In addition, the trade must not consist wholly (or substantially) of, among other activities, banking, insurance, moneylending, debt-factoring, hire-purchase financing or other financial activities.
KICs are defined as those which meet the “operating condition” and either the “innovation condition” or the “skilled employee condition”. We would be happy to help you determine whether your company meets the KIC conditions. Some of the limits in the table above are increased for knowledge intensive companies.
Incentivising your employees: EMI and CSOP share schemes
Tax advantaged share schemes, such as the Enterprise Management Inventive (EMI) scheme and Company Share Option Plan (CSOP) scheme, are brilliant ways of incentivising and retaining employees. Issuing share options to your employees enables them to feel part of the business, as they will obtain a cash payout if the business is sold. This makes them stakeholders in how your business performs in the longer term.
As the shares are issued by the company, generally on a sale of the company, there are minimal cash outflows when the options are granted: only professional fees to set the schemes up and annually report them to HMRC. As such, they are better for cashflow when compared to paying bonuses to individuals.
Qualifying for EMI and CSOP
The company requirements for EMI and CSOP schemes implemented after 6 April 2023 are broadly outlined below:
| Area | EMI | CSOP |
| Maximum number of full-time equivalent employees | The company (or group) must not exceed 250 | No restriction |
| Maximum gross assets on the balance sheet | The company (or group) must not exceed £30m | No restriction |
| Activities the business can undertake | A qualifying trade* | No restriction |
| Issuing company control | The issuing company must not be controlled by another company | The issuing company must not be controlled by another company, unless either company’s shares are listed on a recognised stock exchange |
| Maximum award value under the scheme | £250,000 per employee and £3 million for the whole company | £60,000 per employee |
| Share conditions | The options must be over fully paid-up ordinary shares which are not redeemable. The shares can have reduced rights (such as no voting rights and different dividend rights to other classes) | |
| Option exercise price conditions | The options can be granted at any value, but if the exercise price is less than market value then there are IT implications | Options must be granted at market value |
| Employee requirements | The employee spends at least 25 hours per week working for the company, or if less, at least 75% of their working time working for the company | The individual must be an employee; or if a director, they must work at least 25 hours per week for the company |
| Timing of option exercise | Must be capable of being exercised within 10 years | Broadly, for no IT consequences to arise, the option must be exercised after three years of grant, but before 10 years following the grant |
*The definition of a qualifying trade is broadly similar to that outlined above for the SEIS and EIS schemes. It is possible to obtain advance assurance from HMRC that the activities of the company are qualifying activities.
Tax benefits and implications of EMI and CSOP
Under both EMI and CSOP, where market value at the date of grant is paid for the shares, the difference between the price paid for the shares and the sales price of the shares is subject to CGT. For the CSOP scheme, the CGT rate is up to 20%, whereas for the EMI scheme it may be possible to obtain a 10% CGT rate with the application of Business Asset Disposal Relief.
It’s worth comparing this to non-tax advantaged option schemes, and the liability for income tax and National Insurance Contributions (NICs). The difference between the price paid for the shares and the amount received for the shares is subject to IT (at rates of up to 45%), and potentially to employee NICs (at rates of up 8%) and employer NICs (at rates of up to 13.8%). This shows how huge the tax saving for the employee and company can be via CSOPs and EMIs.
The company which issued the options also receives a corporation tax deduction for the difference between the price paid for the shares and the market value of the shares at the date of exercise. This is potentially a large corporation tax saving at a rate of up to 25%.
For EMI schemes where market value at the date of the option grant is not paid by the employee on the exercise of the option, or where the EMI option holder ceases to be an employee of the company before option exercise, the personal tax position for the individual gets a little more complicated. IT, CGT and NICs may all arise on various amounts.
How BKL can help
Share schemes are complicated for investors and employees alike. If not implemented properly, they can lead to unintended taxes arising.
We’re experienced at advising fintech businesses on how to navigate SEIS, EIS, EMI and CSOP schemes: understanding the tax consequences, ensuring that the company conditions are met and putting the schemes in place securely. This in turn creates opportunities for you to finance your business, keep building a trusted team and plan for a secure future.
Get in touch today for a chat about how we can help.