Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) was launched by the United Kingdom government on 6 April 2012 in order to encourage investors to finance startups by providing tax breaks for backing projects they may otherwise view as too risky.^[1][2]

Tax breaks

The SEIS offers both income tax and capital gains tax reliefs to qualifying investors who subscribe for shares in qualifying companies.

• Investors can obtain 50% relief for income tax on the cost of shares, on a maximum annual investment of £100,000.
• No Capital Gains Tax is paid on profits earned on shares held for more than three years. Capital gains which are realised before three years has expired, but which are reinvested into qualifying SEIS shares, will also be exempt from Capital gains tax. Again, the annual limit is £100,000.^[3]
• Loss relief. Should the company go bankrupt, investors may claim loss relief on their investment which is equal to half of their total investment multiplied by their tax rate.
• 100% Inheritance Tax relief (provided the investments have been held for at least 2 years at time of death).

Key rules

There are a number of complex rules about whether investors and companies can qualify and some of the main rules are listed below. In addition, for shares to qualify, they must be issued wholly for cash and be held by the investor for more than 3 years. They cannot hold any preferential rights.^[4]

The company cannot

• raise more than £150,000 in total through SEIS
• have more than 25 employees in total^[5]
• have assets worth more than £200,000 before the shares are issued
• have been incorporated more than 2 years prior to issuing the shares
• operate in a trade / industry outside of the HMRC SEIS / EIS permitted list

The investor cannot

• be an employee prior to the share issue, unless also a director
• hold more than 30% of shares

Those intending to raise funding under SEIS are encouraged to apply for SEIS advanced assurance by writing to the Small Companies Enterprise Centre (SCEC), which is a division of HMRC. HMRC will provide an opinion as to whether or not the company and it's proposed investment structure are likely to qualify.^[6]

Example SEIS scenarios

(The following examples are sourced from SyndicateRoom^[7] and assume a tax rate of 45% and capital gains at 28%.)

Example 1: The company fails If someone invests £1000 in an SEIS eligible start-up, this is what they can expect to receive in Tax relief and Total Returns:

• £500 tax liability reduction which they can claim for the year they invest or the year prior to investing's return
• £225 returned as loss relief because the company has failed.
• Given an initial outlay of £1000 the actual loss on this investment is roughly £275

Example 2: The company breaks even If someone invests £1000 in an SEIS eligible start-up, this is what they can expect to receive in Tax relief and Total Returns:

• £500 tax liability reduction which they can claim for the year they invest or the year prior to investing's return
• Given their initial outlay of £1000 and taking into account that they have received £500 back in tax relief, if they sell their shares for what they have paid for them (£1000) they will have turned a profit of £500.
• This £500 is tax free if the shares in the company have been held for more than 3 years.

Example 3: The company returns a profit If a person invests £1000 in an SEIS eligible start-up, this is what they can expect to receive in Tax relief and Total Returns if the company sells out for double the value when they invested:

• £500 tax liability reduction which they can claim for the year they invest or the year prior to investing's return
• Given the initial outlay of £1000 is now worth £2000, and factoring in the £500 received back on it from the government, the returns are of £1500 and are free from capital gains tax if the shares have been held on to for more than 3 years.

Further, and for all examples, investors can claim exemption on up to half of capital gains owed in a tax year (up to the SEIS limit of £100,000) given that this amount is invested into SEIS eligible companies.

References

SEIS Guide SEIS.co.uk