What is SEIS?
Designed to complement the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) was launched by the UK Government in April 2012 with the aim of boosting entrepreneurship by helping SMEs to raise equity finance during their very early stages. SEIS investments are deemed high risk, so please make sure you read the full risk warnings below.
Investors are entitled to 5 generous tax reliefs in return for investing in the Seed Enterprise Investment Scheme (SEIS), provided shares are held for a minimum of 3 years.
50% Income Tax Relief
No Capital Gains Tax (CGT)
Capital Gains Tax (CGT) Reduction
No Inheritance Tax (IHT)
* To benefit from the above tax reliefs, shares must be held for three years from the date of investment and the issuing company has maintained its qualifying status. Investments are free from inheritance tax (IHT) as long as the Investment has been held for two years and is held at the time of death.
The information given above provides only a summary of the tax benefits. The rates shown are based on current UK legislation which could change in the future, possibly retrospectively. These tax benefits depend on individual circumstances. At Kin Capital we cannot give out tax advice. If you are unsure of your tax situation you should seek professional advice from a qualified tax adviser. Tax rules and regulations can be subject to change.
How Much Can I Invest?
Investors can invest up to £100,000 per tax year.
SEIS Tax Relief
Investors can claim up to 50% income tax relief on subscriptions invested into SEIS qualifying companies. Therefore, if you make an investment of £10,000, for example, you can save £5,000 in income tax. Did you know that you can also carry back to the previous tax year when claiming income tax relief?
Loss relief is available should an investment fail and you make a loss on your investment. SEIS investments are usually in high risk and early stage startup companies so this is important to note. You can claim loss relief on your net loss (less initial income tax relief). The rate of loss relief you can claim at is the same as your highest rate of income tax. For example, if you make a £10,000 investment and the SEIS qualifying business fails meaning your investment is no longer worth anything you could claim loss relief. Firstly, you can claim the 50% income tax relief (£5,000 in this example), then of the remaining £5,000 you can claim 45% income tax relief on this £5,000 loss, therefore your total loss is only £2,750.
Capital gains tax – this is where SEIS can be very helpful for investors. Investors can benefit in two ways. Firstly, any investment gains made by your SEIS investment may not be eligible for capital gains tax (much like EIS). This is due to disposal relief. Secondly, and unique to SEIS, investors can write off up to 50% of their capital gains tax bill using reinvestment relief.
What is Reinvestment Relief?
Reinvestment relief lets you treat 50% of a gain as exempt from Capital Gains Tax if you acquire SEIS shares. If you get SEIS Income Tax relief on an acquisition of shares, then you can claim reinvestment relief as well. It’s important to note that you cannot get reinvestment relief unless you also claim SEIS Income Tax relief in the same year. To get full reinvestment relief you must invest in SEIS shares an amount at least equal to the chargeable gain. See HMRC’s website for more details.
Sellers of buy to let or second homes should note that with effect from 6 April 2020, the CGT liability on such sales will become due within 30 days of the date of the sale and not through the usual self-assessment tax return process. Although the timing of the CGT liability will be brought forward, CGT Deferral should still be available.
Also remember, that SEIS relief can be claimed up to five years after the 31st January in the year you made the investment.
To qualify under the SEIS, both the investor and the company must meet a number of conditions.
The investor, or someone who is connected with them, must not be an employee of the company in which the investment is being made (although they can be a director). In addition, investors must not hold more than 30% of any of the following (in either the company itself or a 51% subsidiary of the company):
- Voting rights
- Assets on a winding up
As the SEIS is intended to benefit new companies, the company must be unquoted and the trade must be a ‘new’ qualifying trade (less than 2 years old). The company must also have fewer than 25 full-time equivalent employees and net assets of no more £200,000 before any SEIS investment. The maximum amount that a company can attract in investment qualifying for SEIS is £150,000 in total.
James sells an investment property in the current tax year for £200,000, making a gain of £100,000. He invests £100,000 of the proceeds in new shares which qualify under the SEIS. He will be able to claim a reduction of £50,000 (being 50% of the amount invested in SEIS) in the chargeable gain on the shares. James also claims reinvestment relief of £14,000 (50% of £100,000 gain at 28% CGT) and £14,000 (remaining 50% of £100,000 gain at 28% CGT) is reclaimed on a previous gain from 2 years ago, taxed at 28%*. Note: the second £14,000 is only deferred until a chargeable event.
*Please note that the example above uses a CGT rate of 28% for a higher rate tax payer, incurred on the disposal of an investment property or carried interest. New rates of CGT were introduced from 6 April 2016 at 10% (previously 18%) for basic rate tax payers and 20% (previously 28%) for higher rate tax payers. These new rates do not apply to capital disposals involving investment property or carried interest.
In the second column, the company performs well and after three years, the company and James’ shares are acquired at a 50% gain, with James receiving £150,000. His gain of £50,000 is exempt from CGT as the shares have been held for at least three years. The £14,000 CGT previously deferred comes back into tax again at the current rate of CGT, unless the £50,000 is reinvested again into EIS or SEIS shares.
In the third column, the company performs badly and James’ shares are worthless after three years. James will receive £86,500 or 86.5% of his original investment of £100,000. The original £50,000 income tax relief and £14,000 reinvestment relief together with SEIS loss relief on his net cost of investment of £50,000 (£100,000 – £50,000 income tax relief) at 45% marginal income tax rate, assuming he is an additional rate taxpayer. So all in all, a net loss of £13,500 or 13.5% on his original investment of £100,000.
Since SEIS was launched in 2012-13, 8,440 individual companies have received investment through the scheme and £799 million in investment has been raised. (HMRC, May 2018)
SEIS shares must be held for a minimum of three years to benefit from income tax relief, and as such should be seen as a long-term investment.
If your shares are sold before you have had them for 3 years (for instance, if the company exits), you will have to inform HMRC and repay any income tax relief you have claimed.
You cannot claim relief until the company sends you an SEIS3 form, which it cannot do until it has been trading for at least 4 months.
Your claim can be made on the Self Assessment tax return for the tax year in which the shares were issued. If you have an SEIS3 or EIS3 for a year for which you have not yet received a tax return you can request a change to your PAYE (Pay As You Earn) tax code, or an adjustment to any Self Assessment payment on account due. You will still have to make the claim itself on your tax return when you get it.
Claims can be made up to 5 years after the investment was made.
Once the company has been trading for 4 months, follow the below steps:
- The company will then prepare all the necessary paperwork following a successful funding round. They will then make a list of investors who are interested in receiving tax relief, and then send this information to HMRC. HMRC are working hard, however this process can take up to 6 weeks.
- Once the certificates are with HMRC it will be approximately 6-8 weeks before they are sent to the company to sign.
- Once signed the company will then send the certificates to you by post.
- You can then claim any relief you are eligible for by sending the ‘claim form’ section of the SEIS3 or EIS3 form to HMRC.
If you are not in a position to send the claim form, the documentation you are sent will direct you on alternative ways to claim your tax relief.