The Seed Enterprise Investment Scheme (SEIS) is a government initiative which encourages innovation by granting private investors a significant tax break when investing in early stage, ‘high-risk’ companies.
1. Do I qualify to invest in an SEIS company?
1.1 You must have taxable UK income and hold the shares for at least three years
You don’t need to be a UK resident to claim SEIS, but you must have UK income tax liability against which to set the relief. The shares must be held for a period of at least three years from the date of issue for the relief to be retained. If they are disposed of within that three year period, or if any of the qualifying conditions cease to be met before the termination date for the shares (3 years from the date of the share issue), relief may be withdrawn or reduced.
1.2 You cannot be an employee of the SEIS company – but you can be its paid director
You and any ‘associates’ must not be an employee of the company as from the date of issue of the shares and up to the third anniversary of the date of the share issue. An ‘associate’ includes business partners, trustees, and relatives (spouses, civil partners, parents, children, etc.). Brothers and sisters are not considered as associates for SEIS purposes.
However, you can be a director, and receive reasonable compensation for this position.
1.3 You cannot have any substantial interest in the company
You must not have any ‘substantial interest’ in the issuing company at any time from incorporation of the company until the third anniversary of the date of the share issue. A ‘substantial interest’ is defined as you directly or indirectly possessing or having an entitlement to acquire more than a 30% stake in the company. Shareholdings of associates are taken into account in arriving at the 30% figure.
1.4 No related investment arrangements
You will not qualify for SEIS relief if you have subscribed for the shares as part of a reciprocal arrangement which involves somebody else subscribing for shares in a company in which you have a substantial interest in return for the investor subscribing in a company in which the other person has a substantial interest.
1.5 You cannot exceed the limit on relief
You may invest up to £150,000 under SEIS, however, there is a limit on the tax relief that may be used by the investor which is capped at £50,000. So, any amounts invested by the investor exceeding £100,000 are not taken into consideration for the calculation of the income tax relief.
- Tax reliefs available
When you invest in an SEIS eligible company, you can receive tax relief in the following ways:
2.1 SEIS Income Tax Relief
If eligible, you can claim back up to 50% of the value of your investment in the form of income tax relief. Therefore, if you make an investment of £10,000, for example, you can save £5,000 in income tax.
- SEIS Capital Gains Tax Relief:
Disposal Relief:
Depending on your personal circumstances, if you sell your shares after having held them for at least 3 years, then you may be able to pay no Capital Gains Tax on your investment gains. Therefore, if your investment value triples over 3 years, and your shares initially worth £10,000 are now worth £30,000, you will pay no capital gains tax on your £20,000 gain if you decide to sell your shares.
SEIS Capital Gains Tax Reinvestment Relief:
If you choose to reinvest gains from other non-SEIS investments into an SEIS eligible company, you will receive 50% Capital Gains Tax relief on the original investments. Therefore, if a prior investment has given you a gain of £10,000, all of which you decide to reinvest in an SEIS eligible company, 50% of that £10,000 gain will be exempt from Capital Gains Tax and you will be entitled to a refund of tax already paid.
SEIS Loss Relief:
- If the business performs poorly and you lose money on your investment, you may claim loss relief.
- The loss relief you can claim is at the equivalent rate to the highest rate of income tax you pay. So if you pay income tax at a rate of 40%, you can claim up to 40% of your net loss in income tax relief.
- For example, if you make a £10,000 investment and the business fails meaning your investment is no longer worth anything you could claim loss relief. Firstly, you could claim the 50% income tax relief (£5,000 in this example). Then of the remaining £5,000 you can claim 40% income tax relief on this £5,000 loss, so your total loss is only £3,000.
Applying tax relief to a previous year (carry-back):
You can use a carry-back facility allowing you to treat shares as if they were acquired in the preceding tax year.
If, for example, you invest £10,000 in an SEIS eligible company in the 2020-21 tax year, your income tax relief would be £5,000 (50% of £10,000). You can apply to have that £5,000 carried back to the previous tax year (2019-2020) and relieved against your tax in that year, as long as you had not acquired more than £100,000 worth of SEIS shares in that year.
SEIS Inheritance Tax Relief:
After holding the shares for 2 years, there will no longer be any Inheritance Tax on their value.
- Withdrawal or reduction of the relief
Tax relief under SEIS may be either withdrawn or reduced if:
- at any time during the three years from the date of issue of the shares, you dispose any of the shares (a disposal to a spouse or civil partner does not count towards a disposal);
- you receive ‘value’ from the company or from a person connected with that company at any time from the incorporation of the company to the third anniversary of the date of the share issue. The circumstances during which an investor is deemed to have received value from the company include situations where the company repays, redeems or repurchases any of its share capital belonging to the individual, the company repays a debt owed to the individual, the company provides a benefit or facility for the individual, etc.
- there is a put option or call option over the shares at any time before the third anniversary from the date of the issue of the shares.
Finally, it is important to note that apart from the above requirements relating to you as an investor, you will not be able to claim any SEIS tax relief if the company ceases to meet the qualifying conditions and/or fails to spend the money raised by the share issue as required.
SRC-Time are one of the South East’s leading accountancy firms in advising businesses in all aspects of their accounting and tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at info@src-time.co.uk or speak with an account manager to get any process started.
