The Seed Enterprise Investment Scheme (SEIS) was introduced in April 2012 by HMRC to help small, early-stage companies raise funds through individual investors by providing a series of tax reliefs on investments made into qualifying companies.
The Seed Enterprise Investment Schemes offered are tax-efficient investments and are very similar to an EIS. However, SEIS investments provide initial funding of £150,000 to small unlisted companies in their early stages that might otherwise struggle to attract funding.
The government recognises the important role smaller businesses play in a successful economy and offers tax benefits to SEIS investors in order to ensure funding is available.
SEIS Tax Incentives
Investors may become eligible for certain tax benefits available through the SEIS depending on the length of time the underlying investments are held for:
- 50% upfront income tax relief
SEIS investors may claim up to 50% Income Tax relief, provided the qualifying investment is held for at least three years. Investors can claim up to £50,000 for the current tax year (50% of up to a maximum investment of £100,000 per tax year) or up to £50,000 against their Income Tax liability for the previous year, as long as the amount of tax relief claimed is not more than the Income Tax paid.
- Tax-free growth
If an SEIS investment increases in value, there is no Capital Gains Tax (CGT) to be paid.
- 100% inheritance tax relief after two years
As SEIS shares are eligible for Business Relief (BR), so there is no Inheritance Tax payable if held by the investor for at least two years and they are still held at the time of death. For advice regarding BR investors should contact their financial or taxation adviser.
- 50% capital gains tax mitigation
Capital gains made that are reinvested in SEIS shares qualify for a 50% exemption from CGT
- Loss relief
Although it is hoped that shares in the underlying investee companies within a SEIS do not fall in value (FS Ventures SEISs are designed to generate growth, rather than to maximise loss relief), investments can go down as well as up and investors may not get back the full amount invested. Losses from individual SEIS investments can be mitigated as loss relief is available on each individual holding. So, investors can claim loss relief if shares in one company fall in value, even if the other shares in the investor’s EIS portfolio increase in value. Investors can set loss relief against CGT or Income Tax, depending which is the most beneficial for their personal circumstances.
- Your money is at risk
As with any investment, the value of shares can go down as well as up and investors may not get back the full amount invested. Investors should be aware that investment in smaller unlisted companies (including SEIS qualifying companies) carries with it a high degree of inherent risk whether or not it is done via a diversified portfolio, regardless of any tax advantages which such an investment might carry and/or regardless of any steps taken to attempt to mitigate that risk. Investment in a SEIS should therefore be considered a high risk investment.
- Early Stage Investment
Given that an SEIS is the first £150,000 of funding a company receives they are all early stage companies, so in essence the risks are similar to an EIS but reflect the earlier stage of SEIS companies.
- Long-term investment
SEIS shares are typically held in unlisted companies, from which investors might only be able to exit via a refinance or company sale. SEIS shares must be held for at least three years in order to qualify for Income Tax relief. If shares are sold prior to being held for three years, any claimed Income Tax relief will have to be repaid. SEIS investments should therefore be considered as a medium to long term investment and investors are unlikely to have access to their capital during the investment period.
- Tax Rules may change
SEIS tax reliefs are specific to an individual’s circumstances. Tax rules may change and companies may not always be SEIS-qualifying. If a qualifying company fails to meet the requirements of SEIS legislation, tax reliefs may be withdrawn and investors may have to repay rebated tax. HMRC may change the rules on SEIS tax relief at any point.
- You may affect your investment
It is important to remember that tax benefits can be lost due to your own actions. For example, you would have to repay Income Tax relief if you were or became connected with an investee company (for example as a director or shareholder owning 30% or more of the company).
The content of this webpage should not be construed as financial advice.
Any decision to invest should be made only on the basis of the relevant documentation for each investment. Past performance is not necessarily a guide to future performance. The value of an investment may go down as well as up and investors may not get back the full amount invested.
Investments in small unquoted companies carry an above-average level of risk. These investments are highly illiquid and as such, there may not be a readily available market to sell such an investment. You should always seek advice from your financial adviser before investing.