Investing, especially in new and small companies, isn’t for everyone.

 

Whilst some of these companies will succeed, some will struggle and fail. Also, not everyone can wait long to profit or repay their investment.

 

Fortunately, like EIS, the UK government’s SEIS provides tax incentives to lessen the impact of investments that don’t work out and increase the effects of successful ones.

 

What is Seed Enterprise Investment Scheme (SEIS)?

The Seed Enterprise Investment Scheme (SEIS) was introduced by HM Revenue & Customs (HMRC) in April 2012 and was designed by the UK government to complement the EIS.

 

 

SEIS intends to assist small, early-stage companies raise funds by providing various tax reliefs on investments made into eligible companies through individual investors. It applies to companies with f 25 or fewer employees, with assets of up to £200,000, and are carrying or planning to carry on a new business.

 

SEIS offers some of the best tax benefits. It allows you to claim up to 50% of your investment as income tax relief and provides significant capital gains tax reductions.

 

Furthermore, because SEIS is riskier than EIS, your capital gains aren’t deferred, allowing you to halve the capital gains tax you owe.

 

From 2019 to 2020, 2,090 companies raised £170 million under SEIS. This slightly decreased from 2018 to 2019, when 2,125 companies raised £171 million.

 

Figure 1: The number of companies raising funds and the amount raised from April 2012 to 2020

 

For the first time from 2019 to 2020, 1,620 companies used SEIS to raise funds, totalling £145 million in investment.

 

Figure 2: The number of funds raised under SEIS by old and new companies from April 2012 to 2020

 

How Seed Enterprise Investment Scheme (SEIS) Works

SEIS intends to help your company raise capital as it begins to trade by giving tax benefits to individual investors who purchase new shares in your company.

 

SEIS investments are limited to a maximum of £150,000.

This includes the following:

 

  • Any other de minimis state aid received in the three years up to and including the date of the investment
  • Investments made through other venture capital schemes, such as the Enterprise Investment Scheme (EIS), Social Investment Tax Relief (SITR) and Venture Capital Trust (VCT)

 

There are also many rules to follow for your investors to claim and keep SEIS tax reliefs on their shares.

 

For example, tax relief may be withheld or withdrawn from your investors if you don’t follow the requirements for at least three years after the investment is made.

 

How much can I invest in Seed Enterprise Investment Scheme (SEIS)?

A corporation can only raise a total of £150,000 through SEIS investment.

 

If you’re an investor, you can invest up to £100,000 in a single tax year, which can be spread over several companies. The minimum investment varies depending on the fund; however, it is usually around £10,000 in most cases. There’s also a ‘carry back’ facility available.

 

How can the money raised be used for

The rules for Seed Enterprise Investment Scheme (SEIS) shares are the same as those for EIS investments.

 

The money raised by the new share issue must be used for a qualifying business activity, which is either one of the following:

  • qualifying trade
  • Getting ready to carry out a qualifying trade (must start within two years of the investment)
  • Research and development that will result in a qualifying trade

 

Also, the money raised by the new share issue should:

  • Be spent or used within two years of the investment, or, if later, the date you began trading.
  • Not be used to buy all or a part of another company.
  • Cause the investor’s funds to be at risk.
  • Be used to develop your business.

 

Differences between SEIS, EIS and VCT

Although EIS, SEIS and VCT investments are in similar companies, they have significant differences.

 

Here is a table summary of their differences:

EIS SEIS VCT
Maximum annual investment £1, 000,000 £100,000 f £200,000
Holding period 3 years 3 years 5 years
Tax relief 30% 50% 30%
Capital gains tax Gains exempt after 3 years Gains exempt after 3 years Gains exempt within  1 tax year
Capital gains tax deferral relief Yes Yes No
Inheritance Tax Relief Yes Yes No
Loss Relief Yes Yes No
Carry back Facility Yes Yes No

 

Seed Enterprise Investment Scheme (SEIS) Tax Relief Available

1. Income Tax Relief

Income tax relief provides up to 50% of the amount invested, up to an annual limit of £100,000.

 

For example, your £100,000 investment could provide a £50,000 saving on that year’s income tax bill. You must have a substantial income tax liability and hold the shares for at least three years to claim this.

 

2. Capital Gains Seed Enterprise Investment Scheme (SEIS) Tax Relief

Capital Gains Tax is a tax on the profit earned when you sell or dispose of an increased value asset. It’s also the profit you make that’s taxed, not the money you receive.

 

One of SEIS’s main advantages is that investors don’t have to pay capital gains tax on any income gained from investing in a SEIS company.

 

3. Capital Gains Reinvestment Relief

SEIS Reinvestment Relief allows an individual who has sold an asset that would give rise to a chargeable gain to treat up to 50% of the gain as exempt from Capital Gains Tax if they reinvest all or part of it in eligible SEIS shares.

 

If you gain SEIS Income Tax Relief on purchasing shares, you can also claim reinvestment relief. However, note that you must first obtain SEIS Income Tax Benefit before receiving SEIS Reinvestment Relief.

 

4. Loss relief

Investing in SEIS offers loss relief. This enables you to offset losses obtained against your Income Tax or capital gain tax amount. If you make a loss on a disposal of your SEIS shares, you can set this loss against your chargeable gains.

 

5. Inheritance Relief

Inheritance tax is a deceased person’s estate (their property, assets, and money) tax.

The amount you pay is based on the value of your estate, which is calculated by subtracting your assets (cash in the bank, investments, property or company, vehicles, life insurance payouts) minus debts and liabilities.

 

6. Tax-free growth

If you have received an income tax reduction on the SEIS shares and the companies still qualify, you usually don’t have to pay CGT.

 

Criteria to be eligible for Seed Enterprise Investment Scheme (SEIS)

For the company

Your company is eligible to use Seed Enterprise Investment Scheme (SEIS) if it meets the following conditions:

  • Carries out a new qualifying trade
  • Established in the UK
  • Isn’t trading on a recognised stock exchange during the time of the share issue
  • At the time of the share issue, it has no plans or arrangements to become a quoted company or a subsidiary of one
  • Doesn’t have any control over another company unless the company is a qualifying subsidiary
  •  it Has not been controlled by another company since its incorporation date.

Your company and any of its subsidiaries must:

  • Not be a member of a partnership
  • Not have gross assets over £200,000
  • Have less than 25 full-time employees in total

If you’ve received investment through EIS or from a venture capital trust, you cannot use SEIS.

For investors

To benefit from SEIS:

  • You must be a UK taxpayer.
  • You can invest up to £100,000 each tax year.
  • You can’t work for the company, but you can work as a paid director.
  • You must also hold more than 30% of the company’s total shares.

 

What is Advance Assurance (AA)?

Advanced assurance is when you ask HMRC if they agree that investment would meet the conditions of a scheme before you apply. You can use this to show potential investors that your proposed investment may be eligible for a scheme.

 

Before they consider investing, most potential investors will want to receive confirmation of your AA.

 

As a result, it’s essential to allow enough time (1–2 months) for your application to be approved before beginning to offer SEIS investment opportunities.

 

Summary

SEIS is a scheme created by the UK Government to help startups and businesses find investors while offering the best tax benefits.

 

If you’re interested in investing in Seed Enterprise Investment Scheme (SEIS), you can schedule an appointment with us today.

 

We specialise in the government initiatives of the SEIS.

 

We connect angel investors and founders in the heart of London, building strategic collaborations that generate profit and growth.

 

Over 30 years of business experience and a network of innovative entrepreneurs and investors, enabling us to recognise upcoming prospects before they hit the masses.

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