Past performance is no guarantee of future results. Any historical returns or unrealized returns may not reflect actual returns or future performance. All securities involve risk and may result in loss, and startup investing is particularly risky and may result in total loss.
Introduced in 2012 by the UK government, SEIS (the Small Enterprise Investment Scheme) was intended to incentivise individuals to invest in startups, by offering tax relief.
In short, provided a company meets certain qualifying criteria for SEIS, then you can invest up to £100,000 per financial year into these companies and be entitled to 50% Income Tax relief.
In addition to the Income Tax relief, you also receive exemption from Capital Gains Tax on shares you earn from the SEIS you invest in. This exemption applies even if you reinvest the profits from your shares back into the SEIS company.
Company directors can even invest into their own company through under SEIS, provided their company is SEIS-approved. However, you only hold up to 30% of the company shares.
To take advantage of the above tax reliefs, you must hold your shares in the SEIS company for a minimum of 3 years.
However, if you are worried that would potentially expose you to large investment losses, then HMRC offers a nice cushion under the scheme. If the company you invested in fails, then you can offset the loss amount against your Income Tax.
You have a few options when it comes to how you invest. For instance, you can invest directly into a SEIS company, or you might choose to invest in several through a SEIS fund.
So how does this all work in practice? Let’s imagine three scenarios, where an investor puts their money into a company via SEIS:
Scenario 1: Company Failure
Suppose you approach Bure Valley Group and you invest £10,000 into a company in our network, which is SEIS-qualified. Imagine that shortly down the line, this company collapses and you receive nothing in the liquidation.
Let’s also suppose that your UK Income Tax bracket is 45%, and your Capital Gains tax is 28%. What happens to your money?
Well, you initially invested £10,000 and are entitled to 50% Income Tax relief. So you get £5,000 back straight away.
So you really have £5,000 exposed to the loss, not £10,000. In this case, because your Income Tax is 45%, this is the level of tax relief you get on the £5,000. That amounts to £2,250.
So your actual loss is £2,750.
Scenario 2: Company Breaks Even
Again, let’s assume you fit the same tax situation described in the first scenario. You invest £10,000 in a SEIS company, and this time the company has the same value after 3 years.
In this situation, what happens? If the company exists, you have £5000 profit and you will also receive a 50% tax reduction (£5000). So effectively, you get your money back (minus inflation).
Scenario 3: Company Value Doubles
We’re coming at this scenario with you in the same tax situation as above. This time, you invest £10,000 into a SEIS business which goes on to double in value after 3 years.
Again, the initial investment gets 50% Income Tax relief – so you really have invested £5,000. If you sold your shares at this point, you’d have a £10,000 profit which is not subject to tax.
This sum is also not subject to Capital Gains Tax either, because you held your shares for 3 years. So, the total tax-free amount you get back is £15,000.
Which Companies Qualify for SEIS?
A business can apply for SEIS status if they have under £200,000 worth of assets, and have been trading for less than 24 months. The total amount of SEIS investment they can receive under these circumstances is £150,000.
There are some other criteria which must be met by the business as well, to qualify for SEIS. First of all, it must be UK-based and not trading on a stock exchange recognised by HMRC, such as the London Stock Exchange, Boston Stock Exchange or Toronto Stock Exchange.
The company in question also cannot control any other company, unless it meets “qualifying subsidiary” status. In addition, the company cannot be controlled by another one, and it must not be a partnership (the same applied for any qualifying subsidiaries).
The total number of employees in the company also cannot exceed 25 – including any employees in any qualifying subsidiaries.
Finally, the company applying for SEIS also cannot be from a venture capital trust (VCT), and it will be prohibited from SEIS status if the company has received any funds through the Enterprise Investment Scheme (EIS).
Which SEIS Companies Should I Invest in?
Of course, SEIS is ultimately about investing in startups – something that’s generally seen as quite risky. So even if a company qualifies for SEIS status, that doesn’t mean you should necessarily invest in it.
At Bure Valley Group, a huge part of what we do is “stress testing” SEIS companies, prior to presenting them as investment opportunities to our network of investors and consortiums.
In other words, we ensure that SEIS companies have the highest possible chance of success prior to recommending them to our investor network. This significantly increases the chances that you will get a high return on your investment.
We also advise investors on how to diversify their investments in the companies we present. That way, if one company you invest in fails and others succeed, you further minimise your exposure to losses and increase your chances of a solid profit.
Interested in becoming a part of our investor network, and gaining access to our exclusive list of SEIS opportunities? Get in touch today using the contact form on our website!
