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For investors looking for a tax-efficient way to generate strong returns, the Seed Enterprise Investment Scheme (SEIS) is a great option. In this guide, our team at Bure Valley Group shares how SEIS works in 2022, the tax reliefs available and how SEIS can be integrated effectively into a broader investment portfolio.
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What is SEIS?
SEIS was born in 2012 following the success of its predecessor – the Enterprise Investment Scheme (EIS). It was designed to incentivise investment into the UK’s thriving startup scheme, offering generous tax reliefs to improve real returns and mitigate investment risk. This makes SEIS an attractive option, with £189m raised under SEIS for 2,320 companies in the 2017–2018 tax year alone.
Today, an investor can invest directly into an SEIS-qualifying company, or into an “SEIS fund” which holds a collection of them – pooling investors’ resources together. Here at Bure Valley Group, we offer a network of investors and pre-vetted projects which focus on the former.
How SEIS tax relief works
SEIS offers four main tax reliefs to investors who commit capital to SEIS-qualifying companies. The first is Individual Income Tax relief, worth 50% of the amount invested. So, if you invested the full amount allowed for SEIS in a given tax year (£100,000), then you’d get £50,000 back. This means that your “at-risk” capital is only 50% of the amount invested.
The second tax relief is exemption from capital gains tax (CGT) on earnings from SEIS shares. Here, suppose you make a £100,000 investment and the SEIS company doubles in value after three years. At that point, selling the shares would mean gaining a 100% profit with zero CGT.
The third tax relief is exemption from CGT within three years – if the gains are reinvested into SEIS-qualifying companies. Let’s take the previous example again, except this time you sell at 100% profit two years after making your investment. Assuming you then commit these gains straight back into another SEIS-qualifying company, CGT should not apply.
Finally, the fourth tax relief is Loss Relief if the business fails. Imagine the worst-case scenario and your SEIS company folds, with shares at 0% value. If you originally invested £10,000 into the business, then you already got £5,000 back (due to 50% Income Tax Relief). If you are an additional rate taxpayer, then you get back 45% of your at-risk capital via Loss Relief. As such, your actual loss – after all of this is taken into account – is £2,750, not £10,000.
Who is eligible for SEIS tax relief?
To enjoy these benefits from SEIS, investors need to meet certain conditions. You must have UK taxable income (although you do not need to be a UK resident). There must not be any “connection by financial interest” or “connection by employment”. In practice, this means that you cannot be a paid staff member, although you can be a paid director provided you hold no more than 30% of the company’s stock.
You must keep your total SEIS investments under £100,000 each tax year, and you cannot make SEIS investments solely for the purpose of tax avoidance. There must not be any related investment arrangements (e.g. reciprocal investing with another shareholder).
Which companies can apply for SEIS?
SEIS can be available to early-stage companies which meet certain criteria. They cannot have traded for more than 2 years. They should have been established in the UK and must carry out a “qualifying trade”. SEIS companies cannot trade on a recognised stock exchange like the LSE and cannot hold assets worth over £200,000.
How SEIS can be incorporated into a portfolio
Although SEIS provides many tax reliefs and risk mitigation mechanisms, it still involves putting capital towards early-stage businesses which typically involve “higher” investment risk. As such, investors need to carefully consider how to integrate SEIS into their portfolios in light of their risk appetite. Naturally, the more risk you are prepared to take, the more SEIS investments you may wish to include in your asset mix.
The other thing to consider is your tax mitigation strategy. SEIS – and other schemes such as EIS and Venture Capital Trusts (VCTs) – can offer investors ways to save on capital gains tax (CGT), for instance, in addition to other tools such as pensions and ISAs. A financial planner can help examine how your assets are structured from a tax perspective and suggest ways to reduce needless liability in light of your goals. In particular, SEIS (and EIS) allow investors to save on inheritance tax (IHT) if their shares are held for a minimum period. This can open up options to reduce a future bill alongside other tools such as trusts and gifts.
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