Now commonly renowned for its generous tax advantages and capital shielding ability, little over 8 years after being introduced in the UK the Seed Enterprise Investment Scheme (SEIS) has fast made a name for itself as one of the most tax efficient venture capital investment wrappers available.
Introduced in 2012 with the goal of stimulating the growth of startups and early stage companies to subsequently bolster the SME economy, the SEIS presents startups with a vital opportunity to offer private investors (who are able to provide growth capital in exchange for an equity stake of the company) some of the most generous tax reliefs available.
Since its introduction, the SEIS has raised more than £1.4 billion for over 13,800 companies, with 2,090 startups raising capital through the SEIS in 2019/20 alone.
But where the widespread economic impacts of the SEIS on innovation and growth within the SME sector have been well documented over the last decade, the equally significant host of SEIS tax reliefs the scheme offers investors have often not been spoken of to the same extent.
Offering a range of tax incentives varying from 50% income tax relief to zero capital gains tax on returns, the SEIS offers investors some of the most powerful tools for shielding capital, saving for later life, minimising risk and maximising returns.
50% income tax relief
SEIS investors can benefit from 50% income tax relief on investments of up to £100,000 per tax year (the maximum annual investment amount permitted into an SEIS).
For example: If an investor makes a £50,000 investment into an SEIS qualifying company, they would be able to claim a £25,000 deduction on their income tax. This tax relief is provided up to the value of their income tax (i.e. investors with a £25,000 income tax liability couldn’t claim a £30,000 deduction) and is against the investor’s income tax liability for the year whereby the SEIS shares are issued (providing the investor does not make a carry back relief claim).
50% capital gains reinvestment relief
Provided you receive SEIS income tax relief, you can claim exemption for 50% of capital gains tax (CGT) on a gain realised in the same tax year if you reinvest proceeds into qualifying SEIS companies.
For example: If an investor receives a capital gain of £50,000 on an investment outside of the SEIS that would be usually liable to CGT (of 20% for additional and higher rate taxpayers) and makes a and reinvests all of the gain into an SEIS-eligible opportunity, instead of being liable for £10,000 in capital gains tax, they would be liable to pay just £5,000 (50%). Different rates apply for different tax bracket, with additional property being taxed at a slightly higher rate (28% for higher and additional).
Capital gains tax exemption
One of the most crucial SEIS tax reliefs for investors looking to shield their capital from rising public taxes, capital gains tax exemption means you do not have to pay any capital gains tax when selling SEIS shares provided you have held them for at least three years and claimed income tax relief.
For example: If an investor pledges £50,000 into an SEIS qualifying company and sells their shares for £500,000 five years later, the £450,000 capital gain realised would be completely tax free.
If your EIS investment is realised at a loss, it can be offset against the same or previous year’s income tax at your marginal rate, or the same year’s capital gains tax, limiting potential losses should an investment fail.
For example: If an investor invests £50,000 into an SEIS qualifying company and the business fails entirely (usually meaning the investor loses their investment entirely), with the SEIS the investor would receive a further £11,250 in income tax relief on their loss assuming they were an additional rate taxpayer paying 45% income tax (45% of £25,000). This therefore would make their total loss £13,750 (a £50,000 initial investment, minus the initial £25,000 income tax relief and a further £11,250 in loss relief).
Inheritance tax relief
Of particular interest to those investors looking to utilise SEIS investments as part of their inheritance planning, after being held for two years, SEIS investments are eligible for 100% Business Property Relief and become inheritance tax-free.
Analysing risk vs reward
Though this combination of generous tax reliefs is part of the reason the SEIS is renowned for its ability to minimise some of the risks involved with early stage venture capital, it’s important to always consider that every investment involves a level of risk, and when investing in startups this possibility can be especially important to consider.
Whilst SEIS investments can help investors back the next generation of British business, shield investors' hard-earned capital and generate potentially considerable money-on-money returns, others do have the potential to fail and so thorough prior research should be an essential stage of the investment process before any investor parts with their capital.