Investing spare cash in a Seed Enterprise Investment Scheme (SEIS) startup company can be hugely more tax effective than keeping the money in a bank or other low interest paying investment.
SEIS comes with a string of tax breaks designed to lure investors to stake their cash in fledgling companies.
Companies and scheme promoters often talk about the tax breaks involved when taking an equity stake in a SEIS, but pooled together, the potential tax reliefs of a successful SEIS are far more profitable than cash savings.
The Enterprise Investment Scheme association (EISA), which is a trade body for both SEIS and EIS promoters, gives this example of how inheritance relief works for a SEIS.
How the figures work
The assumptions are the investor’s nil rate tax band is already exhausted.
| Initial investment | Holding cash | Investing in SEIS |
|---|---|---|
| Cash investment | £10,000 | |
| SEIS investment | £10,000 | |
| Less income tax relief @ 50% | (£5000) | |
| Net cash outlay for investment | £5,000 | |
| Hypothetical values after two years | £10,500 | £16,000 |
| Less IHT @ 40% | (£4,200) | (£2,000) |
| Value of estate | £6,300 | £19,000 |
| Source: EISA |
To attract IHT relief, the investment must be held for at least two years – then the SEIS in qualifying companies generally have business property relief applied.
A key point is investors must ensure their SEIS or EIS remains within the qualifying rules throughout the life of the investment, otherwise the tax breaks could be withdrawn.
SEIS and business property relief
Business property relief then minimises or completely removes any inheritance liability on the total value of the investment, including any growth in the value of the equity stake.
In this example, putting £10,000 into a SEIS rather than holding the money as cash nearly triples the value of the money at stake.
In addition any income tax or capital gains tax deferral relief against the investment is not clawed back on death.
Any investment in an EIS also attracts inheritance tax relief in the same way as SEIS.
