The Seed Enterprise Investment (SEIS)

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The Seed Enterprise Investment (SEIS)

The Seed Enterprise Investment Scheme (SEIS) was introduced in 2012 by the UK Government. It was designed to boost economic growth in the UK by encouraging investment in small and start-up businesses, whilst offering tax-efficient benefits to individuals who invest.

To say that the Seed Enterprise Investment Scheme, or SEIS, is incredibly generous is somewhat of an understatement. Of course we all hope our investments do well, but if you pay tax at 45% and make an investment of £10,000 that fails completely, you only lose £2,750 due to the tax relief.

That’s what makes the Seed Enterprise Investment Scheme (SEIS) so attractive to investors and why we encourage all entrepreneurs to seek advance assurance from HMRC that they are eligible for SEIS.

 

What are the benefits of SEIS for investors?

  • Investors can receive initial income tax relief of 50% on investments up to £100,000 per tax year in qualifying shares issued on or after 6 April 2012
  • A CGT exemption will offered in respect of gains realised on the disposal of assets in 2012-13, that are reinvested through SEIS in the same year
  • The individual investor can be a director of the company, but not an employee
  • An individual’s stake in the company can be no more than 30%
  • SEIS tax relief applies only to recently incorporated companies
  • The company must have 25 or less employees and gross assets of up to £200,000
  • For 2012-2013 only, a CGT exemption will be offered in respect of gains realised on the disposal of assets that are invested through SEIS in the same year.

Examples

We’re going to keep the numbers straightforward and assume you invest £10,000, pay income tax at 45% and capital gains tax at 28%.

Case 1: The company does well and doubles in value

Investment = £10,000

Income Tax Relief = £5,000 (you get 50% of your investment back as a tax bill reduction)

Profit from sale = £10,000

Capital Gains Tax = £Zero (if you have held the shares for three years)

Tax free return = £15,000

 

Case 2: After three years the company’s value is the same

Investment = £10,000

Profit from sale = £Zero

Your gain = £5,000 reduction in your income tax bill

 

Case 3: The company folds and the shares hold no value

Investment = £10,000

Income Tax Relief = £5,000 (you get 50% of your investment back as a tax bill reduction)

At risk capital = £5,000

Loss relief = £2,250 (45% of at risk capital)

Your actual loss = £2,750 (£10,000 – [£5,000 + £2,250])

 

Carry Back

Did you know that you can carry back your SEIS tax relief back to the previous tax year?

An investor may elect under ITA07/S257AB(5) to have part or all of an issue of shares treated as though acquired in the tax year preceding that in which the shares were actually acquired. This is subject to the maximum annual investment limit for that earlier year (£100,000). The SEIS rate for the earlier year is then applied to the shares treated as acquired in the earlier year and relief given accordingly. As there is no SEIS rate for periods before 6 April 2012 an election under S257AB(5) will be effective only for shares acquired in 2013-14 and later tax years.

For further information please visit the HMRC website.

Here are two examples…

Example 1
Jenny invests £20,000 in the tax year 2012-13 (6 April 2012 to 5 April 2013) in SEIS qualifying shares. The SEIS relief available is £10,000 (£20,000 at 50 percent). Her tax liability for the year before SEIS relief is £15,000 which she can reduce to £5,000 (£15,000 less £10,000) as a result of her investment.

Example 2
James invests £20,000 in the tax year 2012-13 in SEIS qualifying shares. The relief available is £10,000 as for Example 1. However his tax liability for the year before SEIS relief is £7,500. James can reduce his tax bill to zero as a result of his SEIS investment, but loses the rest of the relief available of £2,500 (£10,000 less £7,500).

 

Things to remember

First of all, check that the pitch you’re interested in has got SEIS ‘advanced assurance’ – this is a certificate emailed to the investor by HMRC confirming that investors will benefit from SEIS.

Secondly, you can claim your money back once the business has been trading for a minimum of four months or has spent 70% of the investment they received.

Finally, and this is a big one, SEIS relief can be claimed up to five years after the 31st January in the year you made the investment.

 

How to claim

When the company you’ve invested in has been trading for four months or spent 70% of the total investment, the company must submit form SEIS1 to HMRC (or, more specifically, the Small Companies Enterprise Centre otherwise known as the SCEC).

Once SEIS1 has been reviewed and the requirements met, the SCEC will issue a copy of form SEIS3 for every investor. These are sent to the company of they can be passed on to each investor for them to complete and 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 EIS tax relief.

 

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