Seed Enterprise Investment Schemes (SEIS) were introduced by the Government in April 2012 to encourage equity investment in small, early-stage companies in the UK.
SEIS offered a range of investment tax reliefs to investors as an incentive to help fund the growth of these companies.
Investment tax reliefs available under Seed Enterprise Investment Schemes
The investment tax reliefs available to qualifying investors include income tax relief, capital gains tax exemption and capital loss relief.
1. Income tax relief
Income tax relief of 50% can be claimed against an investment amount of up to £100,000 in a SEIS qualifying company. The tax relief can be claimed in the tax year in which the investment is made or it can be carried back to the previous tax year.
The amount of relief is restricted to amount of tax paid by the investor (I.e. you cannot recover more relief than you have paid in income tax). In practical terms, an investment of £12,000 in SEIS qualifying shares will create a tax refund or credit from HMRC of £6,000.
2. Capital gains tax exemption
A capital gains tax (CGT) exemption can be claimed where a qualifying investor holds SEIS shares for at least three years. Effectively, no capital gains tax liability will be payable on the profit generated from the disposal of shares in SEIS qualifying companies.
3. Capital loss relief
Capital loss relief allows an investor to offset an investment loss made on a qualifying SEIS company. The capital loss can be offset against the income tax liability in the year the loss was realised or the previous tax year. Or the capital loss can be offset against any capital gains in the year of the loss or carried forward to future tax years.
In practical terms, where a qualifying SEIS investment of £12,000 is sold for say £2,000, this creates a gross loss of £10,000. Once the initial income tax relief of 50% (£6,000) is taken into account, this means a net loss of £4,000. A 40% tax payer could claim a further £1,600 capital loss relief on the investment (40% of the £4,000 net loss).
In other words, a £12,000 investment which sold for £2,000 could attract total investment tax relief of £7,600. The tax reliefs would reduce the loss on the investment from £10,000 to £2,400.
4. Other investment tax reliefs
Other investment tax reliefs include a CGT deferral (or re-investment) relief which allows investors to offset 50% of their taxable gain, provided the gain is re-invested in a qualifying SEIS company.
Also, an inheritance tax exemption is available provided the SEIS shares have been held for at least two years.
What is a SEIS qualifying company?
There are detailed rules around what type of companies qualify under the Seed Enterprise Investment Scheme.
For example, the company’s gross assets must not exceed £200k, it must have fewer than 25 employees and have been trading for less than two years.
In addition, companies that engage in specific activities (for example, property development; banking; insurance; lending; farming; hotels) are excluded.
Qualifying companies are permitted to raise £150k as a lifetime investment limit.
Evidence of SEIS Certification
From an investor’s perspective, before committing any funds, the company should be able to produce a SEIS3 Certificate, issued by HMRC, which confirms that the qualifying conditions of the scheme have been satisfied.
Making a claim for investment tax relief
The SEIS3 form enables the investor to make a valid tax relief claim. Claims for tax relief can be made within five years of 31st January after the end of the tax year in which the investment is made.
What’s the difference between EIS and SEIS?
The main differences are summarised as follows:
Criteria |
EIS |
SEIS |
| Maximum amount of investment | £1 million | £100,000 |
| Income tax relief | 30% | 50% |
| Capital gains tax disposal relief | 100% | 100% |
| Capital gains tax re-investment relief | 100% of gain | 50% of gain |
| Capital loss relief | Yes | Yes |
| Inheritance tax relief | Yes | Yes |
Qualifying company: |
||
| Gross assets | <£15 million | <£200,000 |
| No. of employees | <250 | <25 |
| Trading history | <7 years | <2 years |
For more information on Enterprise Investment Schemes (EIS) please click here.
Risks
While the availability of investment tax reliefs provides an attractive financial incentive to invest in SEIS qualifying companies, investors should keep in mind that these companies are high risk and as such there is a higher probability of incurring a capital loss.
In addition, SEIS companies are unquoted, so it may be difficult to sell your shares at a time of your choosing or to obtain a meaningful and acceptable market value for those shares.
Further information
The rules around Seed Enterprise Investment Schemes are quite complex and HMRC has produced a helpsheet which comprehensively explains the scheme.
In addition, EISA – the Enterprise Investment Scheme Association- has produced a Guide giving investors an overview of how SEIS works.
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