SEIS: what is it, and how can it provide tax relief?

5 July 2023

The Seed Enterprise Investment Scheme – or SEIS for short – is a tax investment scheme that can help founders raise funds and investors support startups. Introduced in 2012 to complement the EIS (Enterprise Investment Scheme), it incentivises investors to fund early-stage companies by offering tax breaks on these investments and their returns.

Taken advantage of properly, it can be a win-win for both parties – but how does it work?  

  • SEIS provides extensive tax reliefs for tax-paying investors who support small, early-stage companies in the UK.  
  • SEIS investors can claim tax relief on 50% of investments up to £200,000 and are exempt from any capital gains tax (CGT) on any gains. 
  • Funding small, early-stage companies is risky – so the tax breaks are particularly generous in order to attract more investors to support them. 
  • In doing so, it helps founders raise the capital that they need – and stimulates growth and innovation in the UK startup scene. 

How does the scheme work? 

SEIS offers tax reliefs to individual investors who fund small, early-stage businesses that are just starting to trade.  

Investors are allowed to make a SEIS maximum investment of £200,000 per tax year. Businesses are allowed to receive a maximum of £250,000 through SEIS – note that this figure includes any de minimis state aid received in the three years up to and including the date of the investment. Any later investments made through other venture capital schemes will also have to take this limit into account.  

There are several rules to follow to make sure that the scheme is made use of correctly and they must be followed for at least three years to make sure investors are able to take advantage of the tax breaks offered. 

What are the benefits of SEIS? 

In a nutshell, the seed enterprise investment scheme encourages private investors to invest in early-stage businesses. For founders, this makes the often-difficult task of attracting investment to a small business easier. If the investment works out, investors will enjoy generous tax relief on their gains – and some support if it does not, too.  

Here is a summary of the benefits of the seed enterprise investment scheme for investors:  

  • Income tax relief  
  • Capital gains tax relief 
  • Loss relief
  • Inheritance tax relief  
  • Increased return on investment  
  • Diversification of investment  

The seed enterprise investment scheme also has major benefits for founders: 

  • Easier access to funding 
  • Lower cost of capital 
  • Tax breaks for existing investors 
  • Increased interest from new investors 

 

What kind of companies qualify for SEIS? 

It is important to check that SEIS investments are right for the company. To qualify for SEIS, a company must be:  

  • Based in the UK, and have a permanent establishment in the UK
  • Too small to be listed, and not planning to list within two years of the SEIS investment 
  • Fewer than 25 full-time employees 
  • Less than £350,000 in gross assets 
  • Have traded for a maximum of two years
  • Not have received any previous investment under the EIS or VCT (Venture Capital Trusts) schemes

It is important to note that there are several types of company that are excluded from the SEIS scheme, including:  

  • Companies in financial or banking sectors
  • Companies that are involved in legal or accounting services, property development, or farming
  • Companies that are subsidiaries or part of a larger group of companies 
  • Companies that are carrying out a qualifying business activity such as investment, property management or professional services

 What are the rules for investors? 

Wondering about SEIS investor eligibility? Here is a qualifying list:  

  • The investor must be UK tax payer; paying income tax in the UK 
  • The investor must be over 18 years old
  • The investor must not be employed by the company they invest in, unless they are also a director 
  • They must be able to pay for the shares in cash, and in full 
  • The investor and their associates – for example family members or spouses – cannot together hold more than 30% of shares in the SEIS company 
  • The investor must hold shares for a minimum of three years to qualify for CGT exemption. They also can’t be used as collateral during this time
  • The investor must not be using the scheme for tax avoidance purposes 

 They tend to be most attractive to experienced investors looking to further diversify their portfolios and take advantage of growth opportunities. They hold obvious appeal to those with significant income tax and/or capital gains tax liabilities – although it is important to note that the aim of the scheme is to support young businesses and stimulate growth, not to help investors pay less tax. 

What are the benefits of SEIS for investors? 

SEIS offers a range of benefits for investors looking to support early-stage startups and benefit from tax incentives and potential high returns:  

  • Income tax relief: 
  • Capital gains tax exemption: 
  • Loss relief
  • SEIS reinvestment relief
  • EIS carry forward relief: 
  • Inheritance tax relief: 
  • Portfolio diversification: What are the risks of SEIS for investors?

SEIS does come with potential risks for investors:  

  • High risk: 
  • Longer-term investment: 
  • Illiquidity: 
  • Limited capital loss relief: 

How do you invest in SEIS? 

There are two ways to invest in SEIS: through a SEIS fund or portfolio, or directly in a company. Find out which option is best for you below: 

  • Through a SEIS fund or portfolio: 
  • Investing directly in a qualifying company: 

How much can you invest in SEIS? 

The maximum amount individual investors can invest in SEIS companies is £200,000 per tax year, in exchange for shares. 

To be eligible for SEIS tax relief, an investor must hold the shares for a minimum of three years. If the shares are sold before the three-year time limit, then the investor may not benefit from the full tax reliefs available. It is therefore important that any investor interested in the scheme is comfortable with holding these shares for at least three years, and potentially longer to maximise returns. 

Is your business eligible? 

A business needs to tick a number of boxes to achieve SEIS eligibility. Most of these ensure that it is an early-stage business of a certain size.  

To meet the criteria for SEIS, your business must be a UK-based trading company that has been trading for less than two years. It must have fewer than 25 employees and gross assets of less than £350,000. It must not be trading on a recognised stock exchange and have no arrangements to be a quoted company or a subsidiary of one.  

The amount of de minimis State Aid received by the company can’t exceed £250,000, and it cannot have any other VC or EIS investment. 

What is the SEIS Risk to Capital Condition? 

The Risk to Capital Condition was introduced by HMRC (HM Revenue & Customs) in 2018 to make sure that SEIS or EIS schemes genuinely encourage investment in early-stage startups and will help these businesses grow and develop – rather than to help investors with tax planning or preserving their capital.  

The Risk to Capital Condition has two parts, both of which a company must meet in its application:  

  • For an investment to be viable, the company must have growth and development goals over the long term 
  • The investment must have a substantial risk of the investor losing more capital than the gain as a return – even after taking the tax reliefs into account

What type of shares are eligible for SEIS relief? 

Eligible shares must be new, ordinary, non-redeemable and have no special rights attached. Investors must pay for them in full and in cash only to qualify for seed enterprise investment scheme tax reliefs. The shares cannot be paid for with a loan if the sole purpose of taking the loan is to buy the shares.  

 

While there is a lot to consider, we have had considerable success guiding potential investors to achieve their goals within the SEIS environment. It will take some investment in time, but the rewards can be substantial for the right investors. 

Investigate the options with us – contact BAS Associates to book a specialist in this area, for a consultation. 

 

This information was correct at the time of posting. For the most up-to-date information regarding SEIS please visit the HMRC website.

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