EIS & SEIS: the tax perks are ridiculous — but they don’t rescue a bad investment

EIS and SEIS are among the most generous legal tax incentives the UK offers investors.

Used properly, they can make early-stage investing genuinely asymmetric: meaningful upside, cushioned downside. Used badly, they do what paracetamol does after a big night out. They reduce the pain — they don’t undo the damage.

The rule never changes: if you back companies that fail, you lose money. Tax relief just means you sometimes lose less. Tax relief is the icing, the cake is backing businesses that actually work!

What you get (and why it matters)

1) Up-front Income Tax relief (real cash back)

• EIS: 30% Income Tax relief

• SEIS: 50% Income Tax relief

Example: invest £100,000

• EIS → £30,000 off your Income Tax bill

• SEIS → £50,000 off your Income Tax bill

  
  

In many cases, you can also carry the relief back to the previous tax year (within the rules), which can materially improve cashflow.

My take: SEIS looks more generous because it is more generous — and that’s because it’s earlier, riskier, and closer to zero. HMRC isn’t being kind; it’s compensating you for walking nearer the cliff edge.

2) Tax-free gains if you hold long enough

Hold EIS or SEIS shares for at least three years, claim the Income Tax relief, and don’t trigger a clawback — and any gain on exit is generally free of Capital Gains Tax.

This is the real prize.

If you can identify companies that compound properly, keeping that upside outside CGT is a serious advantage. Over time, this matters more than the upfront relief.

3) Loss relief: the downside is often smaller than it looks

When a start-up fails — which plenty do — EIS and SEIS losses can usually be relieved against income and/or capital gains (subject to conditions).

In practice, that means your true downside is often much lower than the cheque you wrote, because:

• you already got Income Tax relief, and

• you may get additional relief on the remaining loss.

  
  

This is why portfolios matter. The system is designed for baskets, not heroic single bets.

4) EIS CGT deferral: an interest-free loan from HMRC

EIS allows you to defer Capital Gains Tax by reinvesting a gain into EIS shares. The tax doesn’t disappear — it just gets pushed into the future until the EIS shares are sold (or certain events occur).

That delay matters. Deferring tax for 6–8 years is effectively an interest-free loan from HMRC, leaving more capital working for you.

5) SEIS reinvestment relief: a separate CGT lever

SEIS has its own CGT reinvestment relief. In broad terms, reinvesting gains into SEIS can reduce CGT on those gains, subject to the rules in force at the time.

It’s an extra lever — but one that’s often misunderstood or overstated.

6) Inheritance Tax overlap (Business Relief)

Shares in qualifying unlisted trading companies can attract 100% Business Relief for Inheritance Tax once held long enough (commonly two years, assuming the company qualifies).

This isn’t unique to EIS or SEIS — but it’s a useful overlap that many investors forget to factor in.

A simple “one wins, one fails” example

You invest:

• £100k into Start-up A

• £100k into Start-up B

You claim EIS Income Tax relief: £60k back.

• Start-up A doubles → the gain can be CGT-free

• Start-up B fails → you may claim loss relief on the net loss

  
  

Even though one wins and one loses, the tax mechanics can skew the outcome in your favour.

But here’s the part people gloss over: If both are bad, you still lose money. No tax structure on earth creates product-market fit.

Why I don’t obsess over SEIS

SEIS companies are usually:

• earlier

• less proven

• fuzzier on unit economics

• heavier on execution risk

  
  

Yes, the relief is higher. That’s because the risk is higher. Higher relief does not mean a better investment — it just means HMRC is paying you more to take uncertainty.

The only sane way to think about EIS and SEIS

EIS and SEIS are accelerants, not airbags.

They amplify good investing. They soften — but do not cancel — bad investing. They do not turn weak companies into strong ones.

The right order is always:

1. Make the investment case first (market, traction, pricing power, team, distribution)

2. Treat tax relief as a bonus, not the rationale

3. Diversify, because start-ups don’t respect certainty

4. Claim what you’re entitled to — and hold long enough for the reliefs to stick

Get the cake right. Then enjoy the icing!