Thinking of investing in a high-risk start-up? Then, thanks to the Seed Enterprise Investment Scheme (SEIS), you might qualify for some tax reliefs if you do.
The government-backed initiative is designed to help start-ups and young businesses raise money needed to enhance their chances of growing into established companies that continue to benefit the UK economy.
By investing in high-risk early-stage SEIS companies, you can deduct 50% of the total investment amount from how much income tax you must pay this tax year or the one before. If you hold the shares for at least three years, you’ll also avoid paying capital gains tax (CGT) on any profits the SEIS investment brings.
Interested to learn more about the benefits and opportunities SEIS investments could bring you as an investor? Then, our guide will give you the rundown on those tax benefits, the qualifying criteria, and the Seed Enterprise Investment Scheme rules.
What is the Seed Enterprise Investment Scheme (SEIS)?
SEIS is a UK government initiative introduced in 2012 to complement the Enterprise Investment Scheme (EIS), which was launched the same year. Both were introduced to stimulate economic growth in the UK by enticing investment in UK businesses by offering tax relief for investors.
The SEIS investment scheme focuses on raising money for early-stage start-ups. Usually considered high-risk investments, early-stage companies often struggle to attract investors.
SEIS helps combat this by reducing the risks involved via tax breaks for investors. There’s income tax relief, capital gains tax relief, and loss relief benefits. If used correctly, the scheme can prove a win-win for both parties.
SEIS-qualifying companies raise money for their growth and development, and individual investors receive tax relief for making a high-risk but potentially high-reward investment.
New SEIS Regulations Implemented in 2023
The rules of the SEIS investment fund are subject to change at any time. In fact, they’ve changed numerous times over the years, the latest being in 2023. We’ve summarised the changes below:
Previously, the maximum received investment a company could receive from SEIS was capped at £150,000. It has now been increased to £250,000.
In addition, companies can now receive SEIS funding over their first three years rather than the two under the previous regulations.
The final significant change is that companies now qualify if they have gross assets of no more than £350,000, an increase from the previous £200,000.
How Does the SEIS Differ from the EIS Scheme?
While both initiatives were launched the same year and offer tax relief to investors, they differ due to the size of the companies they help.
As previously mentioned, the Seed Enterprise Investment Scheme is aimed at early-stage start-ups. The EIS fund is focused on attracting investment from more established medium-sized companies.
The maximum amount you can invest and the tax relief rates also differ. However, the SEIS offers more attractive tax reliefs when compared side-by-side.
What are the Benefits of SEIS for Investors?
The benefits of SEIS are all tax-related. You can gain a reduction in income tax, avoid CGT bills, and even defer gains by re-investing them. There’s also a level of mitigation for when the investment turns sour, with loss relief there to lessen the financial damage.
We’ll get into more detail about each of the tax breaks below:
Income Tax Relief
Investors qualify for 50% income tax relief on their investments. That is up to the maximum annual investor limit of £200,000 per tax year allowed via the scheme. Therefore, anyone investing that much will save £100,000 per year on tax bills.
You can also decide to claim that income tax relief for the current tax year or backdate it to the previous year. How you split it across those years is up to you, but it must be detailed clearly when filling your tax return.
Capital Gains Tax Relief
Another significant SEIS tax relief is the capital gains tax relief that investors can benefit from. Whether you receive this relief depends on the success of your investment, as you’ll avoid paying the usual 18-24% (depending on your income tax rate) tax on any gains made when selling the shares. Without gains, there’s no benefit.
This is why CGT relief is one of the most attractive aspects of the SEIS scheme for investors. If a risky investment pays off, it’s a double win, as there’s no CGT tax to pay. Just remember that the relief only qualifies once you’ve held the SEIS shares for at least three years.
Capital Gains Deferral Relief
Additionally, investors can defer a capital gains tax bill on other investments or assets if they invest the gains in SEIS-qualifying companies. Say you sell a property and make significant gains; if you re-invest all the money raised into a SEIS company, you’ll not have to pay the CGT you normally would.
The same goes for gains made from money re-invested in a SEIS company. You can effectively defer CGT year after year if the right investments are made.
Loss Relief
Fewer than 40% of UK startups make it past their third anniversaries, which showcases how much of a risk this type of investment is. It also shows how important it is to do your homework to establish which investments have the best chance of surviving.
If the company you’ve invested in does fail, there is at least loss relief which can help soften the blow. Any shares sold at a loss can be offset against income tax in the current or previous year.
Inheritance Tax Relief
Your beneficiaries also receive tax benefits on your investment should you pass. If you’ve held the shares for two years or more, they’re exempt from inheritance tax. Even if you’re not around to benefit from this particular tax relief, at least somebody does.
What SEIS Rules Should Investors Be Aware of?
Before jumping ahead and finding some promising SEIS investment opportunities, it’s essential to understand the scheme’s rules. They can also change at any time, so we recommend regularly checking the UK government’s website to stay up to date with the current rules and regulations.
The Company Must be Eligible for SEIS Relief
A company must meet many criteria before it is deemed eligible for the Seed Enterprise Investment Scheme (SEIS).
For instance, it has to be a UK-based company that has been trading for less than three years, has no more than 25 employees, and has gross assets of no more than £350,000.
Before having advanced talks with a business, ensure it meets the above criteria. Better yet, ask if the company has received Advance Assurance from the HMRC.
Advance Assurance is the official confirmation that the company meets the essential criteria for the SEIS scheme. It is not a 100% guarantee that it will meet all requirements, but the chances look good that it will.
You Must Have Income That Is Liable for UK Income Tax
You’re not required to be a UK resident, but to qualify for benefits such as income tax relief and capital gains deferrals, you must have UK income that is liable for income tax.
You Cannot be an Employee of the SEIS Company
The company cannot employ you and any of your associates from when the shares are issued until three years later.
The exception is if you’re a company director. That is allowed as long as you earn a reasonable wage for your position.
You Must Not Hold More Than a 30% Interest in the Business
You’re not allowed to have a ‘substantial interest’ in the company. Essentially, that means you’re not permitted to hold more than a 30% stake. That is from the company’s incorporation up until three years after the date of the share issue.
You Must Hold the Company Shares For At Least Three Years
Only shares held for three years qualify you for SEIS tax reliefs. Shares disposed of before that cut-off could result in the reduction or even withdrawal of SEIS relief.
Transferring shares to a spouse or civil partner are permitted, which will not count as disposing of the shares.
You Cannot Invest More Than £200,000 Per Year
As per the rules of the SEIS scheme, while companies can receive up to £250,000 investment from SEIS, as an investor, you cannot invest more than £200,000 per year.
If you want to make larger investments, the EIS (Enterprise Investment Scheme) might suit you more. You can invest up to £1 million per year or double that if the business is a knowledge-intensive company. The tax breaks are not as good, but the investments are generally safer.
You Must Pay for the Shares Up Front and in Cash
The shares issued by the SEIS-qualifying business must be regular full-risk shares issued without giving you preferential rights to the company’s assets. Furthermore, you’re required to pay for the shares up front and in cash.
How to Invest in SEIS
If you’re considering investing in a company through the Seed Enterprise Investment Scheme, you have two options: You can do it yourself by directly speaking to and investing or through an SEIS fund or portfolio.
Both offer benefits, which you’ll see below:
- Through a SEIS Fund or Portfolio: The safest option is to use a fund or portfolio as you can diversify your investment rather than risk it on a single company. You’ll also save time, as a fund manager will oversee the investments and put in the hard yards when considering investment opportunities. Conversely, you’ll have less control, while this type of investment also involves a fee.
- Investing Directly: If you have investment experience and a strong belief in a particular SEIS business, you might consider direct investment. It is more risky than going down the portfolio route, as all your investments depend on a single company’s success.
Which you choose is up to you, but we’d recommend a fund or portfolio for investors lacking experience.
What are the Steps When Making an SEIS Investment?
An investor needs only to raise the money and follow the SEIS rules as mentioned above. The business hoping to receive SEIS investment must complete most of the important steps.
- They first have to ensure they meet the criteria for the scheme.
- Ideally, they apply for and receive advance assurance.
- Next, they make a formal application for SEIS relief to the HMRC. They will have to send a business plan, financial forecasts, and other documents while sharing information about other venture capital schemes they’ve participated in.
- With advance assurance, they can issue the shares, and you can purchase them.
Once they’re officially given qualifying status into the Seed Enterprise Investment Scheme, they must provide you a copy of the compliance statement they receive.
You’ll need that compliance statement to claim income tax relief and other tax benefits the SEIS scheme promises.
Does SEIS Sound Like an Interesting Investment Opportunity?
As with any other investment, we strongly suggest you spend a lot of time reading up on the Seed Enterprise Investment Scheme rather than jumping in head first.
These are risky business investments that could bring great rewards should they succeed. Perform strict due diligence on any SEIS company you’re interested in investing in.
We also recommend that you ask the company to apply for advance assurance so that you can have confidence it will qualify for the scheme and lead to significant tax benefits for you.
Also, make sure you fully understand the SEIS tax rules for investors. Importantly, the shares you buy have a minimum holding period of three years. You will not receive benefits for your taxes until that time.
If you have done your research via our article and others and have read the rules for the SEIS fund on the UK government’s website, then it is a good time to consider whether a SEIS investment is a good idea.
