EIS (Enterprise Investment Schemes) should be applicable to search funds

January 28, 2025

by an investor from University of Oxford in London, UK

Has anyone had success applying EIS to a search fund? I saw some posts here 2/3 years ago which weren't conclusive. The main clause from HRMC that makes this possible is below:

"If you did not receive investment within the first 7 years, or now want to raise money for a different activity from a previous investment, you’ll have to show that the money: > is required to enter a completely new product market or a new geographic market > you’re seeking is at least 50% of your company’s average annual turnover for the last 5 years"

I've seen several search funds that nearly cross this 50% threshold and the new product or market clause applies as well. These deals often also use debt where it would be far more advantageous to increase the equity component given the significant tax benefits.

Reply by a searcher
from University of Glasgow in Edinburgh, UK

Also interested in replies on this - my sense was that it would be difficult to get approval. The criteria I've seen is: The company receiving SEIS/EIS investment must be conducting a new trade or significantly expanding an existing one. Simply acquiring assets to continue the same trade as the seller might not qualify unless there is a significant element of innovation, new products, or expansion. Exclusions for Existing Trades: If the assets are used solely to carry on a pre-existing trade (e.g., taking over an established business's operations with no meaningful change), it may disqualify the SEIS/EIS eligibility. Example: Allowed: A company uses SEIS funds to buy bakery equipment from a closing business to start its own bakery with a new brand and products. Not Allowed: A company buys the entire trade and goodwill of an existing bakery to continue running it as-is.

Reply by an investor
from University of Oxford in London, UK

Yes on further review this is indeed a challenge. Potentially a way to handle this could be to structure the deal so that a portion of the shares are bought and separately there is a new issue for growth where this issue qualifies for EIS. This seems messy however. My thinking is that a searcher would usually push for growth beyond previous owner's ambitions so the risk profile of the business will have changed therefore some EIS-style relief seems sensible.

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