What is SEIS?
Seed Enterprise Investment Scheme (SEIS) is an attractive source of funding for early stage trading companies and an exciting tax advantaged investment opportunity for business angel investors.
Key facts relevant to SEIS are as follows:
- SEIS is available for business angel investors and early stage companies seeking seed funding from 6 April 2012.
- It allows qualifying investors to receive 50% income tax relief on investments up to £100,000 per year. So for every £1 invested, HM Revenue & Customs will refund 50p regardless of the investor’s rate of income tax.
- SEIS investors will pay no capital gains tax on ultimate disposal of their shares so long as the company remains as a qualifying SEIS company for 3 years. So even if the investee company turns into tomorrow’s Facebook, the investors will not pay a penny in capital gains tax on ultimate exit.
- Reinvested capital gains can secure a 50% reduction in capital gains tax suffered – so if say, an individual sold a rental property and realised a profit / gain of £100,000 they would normally be liable to pay up to £28,000 capital gains tax. However, they could reinvest this into a SEIS investment and receive 50% relief on the gain (resulting in a £14,000 tax saving – in addition to the receive £50,000 income tax relief) – this equates to a whopping 64% tax relief!
- If the company should fail, the investor can receive income tax relief on the loss in value of their shares (after taking into account the income tax relief already received). An additional tax rate payer (45%) could receive income tax loss relief at an effective rate of 22.5%. Taken together with the above tax reliefs, the potential total tax relief could equate to 86.5% i.e. the downside risk from the outset is limited to 13.5%!
- The investment would fall outside the investor’s estate for inheritance tax purposes after holding the shares for two years
- The investee company must have been trading for less than two years to qualify for Seed EIS – remember this is aimed at early stage companies only – and must be unquoted (AIM and PLUS listings count as unquoted for these purposes)
- Companies are limited to raising a cumulative maximum of £150,000 under SEIS – after this, they may be eligible for SEIS’s Big Brother, EIS, provided 70% of the SEIS cash has been spent.
- Qualifying companies must have less than 25 employees and gross assets of £200,000 or less (before the investment round).
- An investor cannot control the investee company with share subscriptions limited to 30%. Investors can be directors but not employees.
- Companies can obtain advance assurance from HMRC on whether the company is a qualifying SEIS company.
This is a great opportunity for start-up founders to access much needed capital at a time when traditional sources of bank and grant funding are thin on the ground.