In 2019-2020 you can invest up to £100,000 each financial year into UK companies which qualify for the Seed Enterprise Investment Scheme (SEIS).
This exciting investment scheme is still relatively unknown amongst investors, but it offers great opportunities for investors to engage with innovative startups whilst reducing their risk exposure.
This short guide outlines, in broad terms, how much you can invest in SEIS and explains some of the great benefits on offer. As we’re sure you’re aware, please note that this content is for information purposes only and should not be taken as investment advice. Capital is at risk and you may get less money back than you originally put in.
SEIS Benefit 1 for investors: 50% Tax Relief
One of the key benefits of SEIS to investors is the attractive tax reliefs available.
In particular, investors can receive a 50% tax relief on their SEIS investments (which, remember, must be no higher than £100,000 per UK tax year).
In practical terms, that means you could make a £50,000 SEIS investment and get £25,000 back in the form of income tax relief.
SEIS Benefit 2 for investors: CGT Tax Relief
Under SEIS, any gains you make on shares which you own within a SEIS-qualifying company are also usually exempt from Capital Gains Tax.
The main condition here is that you must hold the shares for at least 3 years
Suppose, therefore, that you make an investment of £20,000 and this triples in value over three years. Your shares are now worth £60,000, and if you decide to sell them then the £40,000 gain you have made should not be subject to CGT.
Of course, this is just an example and it’s important to remember that your investment might also go down in value over time.
One important caveat to mention here is “deferral relief.” Here, you can “put off” any CGT on any asset which you sell and then go on to invest in a SEIS-qualifying company. However, you will probably have to pay CGT on the SEIS shares when you eventually do sell them.
Benefit 3 of SEIS for investors: Loss mitigation
You can off-set any investment losses against your Income Tax bill, too. The amount you get back is equivalent to your highest income tax bracket, which can significantly reduce your risk.
For instance, suppose you are taxed at the 45% rate. That means you could claim back up to 45% of your SEIS investment if it fails. So, imagine the following scenario:
- You invest £20,000 into a SEIS-qualifying business.
- You get 50% of this amount back in the form of a 50% tax bill reduction.
- Your at-risk capital is, therefore, actually £10,000.
- The company, unfortunately, fails and so leads to a total loss in share value.
- Your loss relief on this £10,000 is 45% (i.e. your highest income tax bracket).
- Your real loss is, therefore, £6,500. Not £20,000.
Benefit 4 of SEIS for investors: Inheritance tax relief
As if the above benefits were not enough, if you hold your shares in a SEIS company for at least two years then they can be exempted from your inheritance tax bill.
So, take the example from point 2 above, once more. Suppose your £20,000 SEIS investment grows to £60,000 over three years. Soon after this point, you die and leave your investments to your sons and daughters. This £60,000 should be able to pass to them, free of IHT.
Important rules for SEIS investors
To be able to invest in SEIS-eligible companies, you must:
- Be a UK taxpayer.
- Only invest up to £100,000 into SEIS-qualifying schemes each financial year.
- Hold your shares for at least 3 years, or risk experiencing “relief clawback”.
- Not carry-forward tax relief under SEIS.
Rules for SEIS companies
There are not just rules for investors under SEIS, but also for companies looking to receive funding via the scheme. In particular:
- A company can raise up to a maximum of £150,000 via SEIS funding.
- The business must employ no more than 25 full-time staff.
- The company cannot have traded for more than 2 years.
- No more than £200,000 worth of assets can be possessed by the business.
- The business must carry out a government-defined “qualifying trade”. Examples of trades which might not qualify include financial services and property development.
Guidance for investors: things to look for
Naturally, if you are interested in investing via the SEIS scheme then you should check whether the company pitching to you meets the criteria outlined immediately above.
Moreover, it is also a good idea to look for evidence of “advanced assurance”. This is whether HMRC grants the company seeking SEIS status a formal letter, which usually takes the form of a certificate outlining the benefits that the investors will receive from the SEIS investment.
You will also naturally want to consider whether you are interested in the pitch, and also “stress test” the viability of the company’s business model to ensure your investment has the best possible chance of meeting success.
At Bure Valley Group, we help with this latter point by gathering a set of “pre-stress-tested” companies which qualify for presentation to our network of experienced SEIS investors.
These businesses are exciting and full of potential, driving innovation in a number of key industries. If you are interested in exploring our range of current EIS and SEIS investment opportunities, then we invite you to check out our SEIS portfolio here.
If you have any questions about how SEIS works or how we at Bure Valley can assist you in incorporating SEIS opportunities more into your investment portfolio, then we’d love to hear from you. Get in touch via +44 160 334 0827 or [email protected].