What is the SEIS and how does it work
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The Seed Enterprise Incentive Scheme (SEIS) encourages individuals to invest in new businesses that are just starting up. It is an increasingly popular way of investing as the scheme has lots of tax benefits associated with
What is the Seed Enterprise Investment Scheme (SEIS)?
The SEIS is a UK government-backed tax-relief initiative that was introduced in 2012. It was introduced to help new businesses receive more funding than they would otherwise. This helps to encourage innovation and entrepreneurship.
This was achieved through providing tax relief to individuals who invest in qualifying early-stage companies.
The scheme has been very popular and impactful due to the tax benefits available for investors. In the 2020/21 tax year, 2056 companies raised a total of £175 million through the SEIS scheme.
What kind of tax relief does the SEIS offer?
The SEIS offers individual investors that use the scheme Income Tax relief of up to 50% of the amount invested.
The scheme also provides exemption from Capital Gains tax on any profits made from selling shares obtained through the SEIS scheme that have been held for at least three years. The SEIS also gives 50% Capital Gains tax relief on gains from an investment in a non-SEIS company when any profit made is reinvested into an SEIS-eligible company
Loss relief is available for the investors using the scheme in case the company fails. This rate of tax relief is equal to the investor's highest rate of Income Tax that they pay.
Finally, investors pay no Inheritance Tax on shares that have been held for at least two years and obtained through the SEIS.
How much tax relief can I get from the SEIS?
Let's assume, for this example, that you have a taxable income of £120,000.
Here's how investing in an SEIS-eligible start-up can help you save on taxes:
- Initial investment: Let's say you invest £10,000 in an eligible SEIS start-up.
- Immediate tax relief: You can receive a 50% income tax relief on your investment, amounting to a £5,000 reduction in your tax liability.
- Capital gains deferral: If you've made a capital gain in the same tax year, you can defer that gain by reinvesting it in an SEIS-eligible company, resulting in further tax savings.
Eligible individuals can claim up to 50% of the amount invested as Income Tax relief. But, there are limits on the total amount that can be invested through the SEIS scheme, which is £200,000 for the 2023/24 Tax Year.
Do keep in mind that some individuals do not qualify for SEIS tax relief. This includes individuals that are classified as associates of the company. These individuals may be Employees of the company, hold more than 30% of the shares of the company, or be close relatives like spouses, parents, or children to the owner of the company. Siblings do not count as associates.
What companies qualify for SEIS funding?
To qualify for SEIS funding, a company must be UK-based, have fewer than 25 full-time employees, and have assets of no more than £200,000.
It must also carry out a new qualifying trade. This is defined as a trade that has not been carried out by the company or any other person for longer than two years at the date of issues of the shares.
Activities like insurance, banking, property development for example count as excluded trades and companies that carry out these activities do not qualify for the SEIS.
How do I claim SEIS tax relief?
To claim SEIS tax reliefs as an investor, you need to have the following documents:
- SEIS3 form: This is the most crucial document, provided by the start-up you've invested in. The SEIS3 form is a tax relief claim form that certifies the company's eligibility for SEIS and provides details about your investment. The company should have received advance assurance from HMRC, confirming its SEIS eligibility before issuing the SEIS3 form.
- Share certificate: You should have a share certificate or other proof of investment, indicating your ownership of shares in the SEIS-eligible start-up.
- Investment details: Keep a record of the investment date, amount, and any related transaction documents.
Once you have these documents, you can claim your SEIS tax reliefs by including the information in your Self Assessment. If you haven't yet received your SEIS3 form but want to claim the relief, you can contact the start-up and request the form. Remember that you must hold the shares for at least three years to retain the tax benefits associated with the SEIS investment.
Is the SEIS a good way to support early-stage businesses?
Yes, the SEIS is a fantastic way to support early-stage UK-based businesses while also benefiting from some pretty significant tax relief. The SEIS is more applicable to smaller businesses than a scheme like the Enterprise Incentive Scheme. It rewards investors who are willing to take on the higher level of risk associated with early-stage companies.
