Seed Enterprise Investment Scheme (SEIS) Tax Relief
The Seed Enterprise Investment Scheme, or SEIS, was introduced in April 2012 as an additional incentive for UK taxpayers to invest in early stage companies. The scheme provides investors with incentives such as: income tax relief, waiving of capital gains tax, and the ability to carry SEIS tax relief one year backwards or forwards. It is important to note that companies must individually apply to be SEIS eligible, and investors will not receive tax relief unless the company they are investing into has been agreed as qualifying for SEIS relief by HMRC. Once the company has been approved for SEIS tax relief, HMRC will then issue a “SEIS3 Form,” which the company must then complete and send to each investor.
Benefits of the SEIS Scheme:
Income Tax Relief
If the value of your investments in a tax year is £200,000 or more, you can get a income tax deduction of up to £100,000. If the value of your investments is less than that, you’ll get a deduction from your income tax, accounting for 50% of your investments.
Capital Gains Tax Relief
Disposal Relief: If you hold the assets you acquired through investments for at least three years and sell them for greater value than the one you paid for initially, you’ll be exempt from the Capital Gains Tax.
Deferral Relief: If you sell any asset in your possession in order to acquire shares in a company which qualifies for the SEIS scheme, you are not required to pay the Capital Gains Tax until a later date (usually when you get rid of the SEIS shares).
Capital Gains Reinvestment Relief
If you made a previous investment of any kind which brought you financial gains and decide to reinvest them in a company which qualifies for the SEIS scheme, you will be exempt from 50% of the Capital Gains Tax.
Carry-Back Relief
If you invest in a SEIS-eligible company and you respect the requirements and rules explained above, you can apply the earned tax deduction to the income tax of a previous year. However, you must not have acquired more than £200,000 worth of SEIS-eligible shares in the fiscal year you want to carry-back your deduction for.
Loss Relief
This kind of relief is applicable if the investment you made does not prove profitable or the business fails. This relief also applies to the income tax. After deducting 50% of the value of your investment from it, you are normally left with the other half of your investment lost. However, through SEIS Loss relief, you can ask for another income tax deduction accounting for the percentage represents your income tax from the lost half.
Inheritance Tax Relief
If you hold the shares of a SEIS-eligible company you invested in for more than 2 years, those shares will be inheritance tax exempt.
Requirements For The Company When Issuing Shares:
The company/group must have fewer than 25 employees.
The company/group must have no more than £350,000 in gross assets.
The company/group must not have received more than £250,000 under the scheme.
The business must not have been trading for more than 3 years.
The investment must be in ordinary shares that are not redeemable or carry any preferential rights.
Restrictions For The Investor:
You can invest up to £200,000 per annum under SEIS.
You cannot control more than 30% of the company’s shares.
You cannot be associated with the company that you invest in as an employee, manager, founder etc.
You must hold the shares for a minimum of 3 years.
The shares you invest in must be issued no earlier than the 6th of April 2023.
You must be a UK taxpayer.
Here are a couple of examples of how the tax reliefs apply in a real environment:
First of all, let us talk about the benefits that apply to your previously obtained funds, once you decide to invest them in a SEIS-eligible company. If the money were obtained through the sale of an asset, you do not have to pay the Capital Gains Tax as long as you have the SEIS shares. If you invest the money obtained from a previously successful non-SEIS investment, you only have to pay 50% of the Capital Gains Tax for the value you decide to invest.
Now, let us say you decide to invest the maximum amount of £100,000 in a recently incorporated innovative startup. The startup we are talking about is offering a new solution and attracts multiple investors, you ending up owning 20% of the company in shares.
At the end of the fiscal year, £50,000 of your income tax will be deducted. Therefore, the startup or small business you invested in will benefit from a capital influx of £100,000 and your liquid assets will only decrease with half of that. If you want, you can apply this deduction to a previous tax year.
If the investment proves to be successful and profitable and the shares you acquired for £100,000 are sold for £300,000 after a minimum of three years, there is no Capital Gains Tax to be paid for the gained capital.
If the shares are held for two years, they will be exempt from the inheritance tax.
If the investment does not prove to be successful and the business fails to bring any revenue, the £100,000 you invested is not lost in its entirety. First of all, you get £50,000 back as income tax deduction. Second of all, you can also ask for a loss relief, accounting for the percentage that represents your income tax from the remaining amount. So, if your income tax is 50%, you will get another deduction of £25,000. Therefore, at the end of the day, a bad investment of £100,000 will only cost you £25,000.
How To Claim SEIS Tax Relief
After trading for 4 months, or spending at least 70% of the investment, the company must complete an SEIS1 form and submit it to HMRC
Once SEIS1 has been reviewed and HMRC agrees that the requirements are met, HMRC will issue a form SEIS2 to the company authorising the company to issue SEIS3 to the investor to submit as part of their tax return.
PLEASE NOTE
The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment. Please visit the HMRC website for further information on tax relief.
