What is the Seed Enterprise Investment Scheme
The Seed Enterprise Investment Scheme (SEIS) was launched in April 2012, designed to encourage investors to finance startups by providing tax breaks for backing projects they may otherwise view as too risky.
Investors Requirements
An individual investor can’t invest more than £100k per tax year.
An individual investor can’t control the company or hold more than 30% of the equity.
Company Requirements
UK based and have a permanent establishment in the British Isles.
Fewer than 25 employees.
Trading for less than 2 years.
Assets of less than £200k.
Some sectors are excluded (I.e. finance, investment & property).
Investor Advantages
Income Tax Relief
Receive 50% income tax relief in the year the investment is made.
Relief can be carried-back to previous year if previous allowance wasn’t fully utilized.
Capital Gains Tax Exemption
Gains from shares sold after at least 3 years are 100% exempt from tax.
CGT Reinvestment Relief
Capital Gains Tax due on funds reinvested under SEIS are reduced by 50%.
Loss Relief
If the company fails, the loss can be offset against tax on other income at the level of your highest income tax.
Investment (minus 50% to account for income tax relief) * current income tax rate.
Advanced Assurance
Early in the process, ask HMRC if your share issue is likely to qualify for SEIS, once assured this gives investors the knowledge their tax break status is assured.
Important Notes
When considering ownership and control HMRC includes holdings by relatives “spouses or civil partners, parents and grandparents, and children and grandchildren”. So EIS relief can’t be claimed by founders or founders’ relatives if their combined holding is over 30% of the shares or gives them control of the company (instead you should explore entrepreneurs relief).
It is possible to claim both Income Tax relief and Reinvestment relief at the same time.
Currently capital gains is 28% at the higher rate, so sell £100k worth of shares, and get 50% * 28% back in relief (£14k) plus income tax relief of 50% on £100k results in a total of 64% off the cost of investment.