The Seed Enterprise Investment Scheme
Through the Seed Enterprise Investment Scheme (SEIS), investors, including directors, can receive initial tax relief of 50% on investments up to £100,000 and Capital Gains Tax (CGT) exemption for any gains on the SEIS shares.
The Seed Enterprise Investment Scheme, or SEIS, is incredibly generous. 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.
Who can claim?
- 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
As with our EIS tax relief 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.
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 and 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 SEIS tax relief.
Risk warning
Investing in start-ups and early stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Crowdcube is targeted exclusively at investors who are sufficiently sophisticated to understand these risks and make their own investment decisions. You will only be able to invest via Crowdcube once you are registered as sufficiently sophisticated. Please click here to read the full Risk Warning.
This page is approved as a financial promotion by Crowdcube Capital Limited, which is authorised and regulated by the Financial Conduct Authority. Pitches for investment are not offers to the public and investments can only be made by members of crowdcube.com on the basis of information provided in the pitches by the companies concerned. Crowdcube takes no responsibility for this information or for any recommendations or opinions made by the companies.
