The stampede is on to invest to max out this financial year’s tax allowances – and some of the most generous tax breaks are offered by the Seed Enterprise Investment Scheme.
Investors can take two routes into SEIS – direct investment into a start-up company or staking cash through a managed fund.
Most direct investment is via crowdfunding platforms – many flag start-ups that are pre-approved by HM Revenue and Customs as companies qualifying for the schemes.
HMRC figures disclose more than 2,000 companies picked up SEIS cash worth £168 million in 2014. The average stake was £81,000.
SEIS offers some of the best tax breaks anywhere in the world to investors.
Investing in a SEIS company
Investors can stake up to £100,000 in start-up companies during a financial year. The money does not have to go to a single company, but can be spread around several investments.
The returns include:
- A 50% refund on income tax paid pro rata the investment amount. So, an investor putting £81,000 in to a SEIS company would pick up a £40,500 income tax refund.
- The tax refund is not tied to the rate of tax the investor pays – only the overall amount.
- Any profit on the share value is free of capital gains tax
Don’t forget the tax breaks are refunds and not repayments – if the refund exceeds the tax paid in a year, a carry-back facility is available.
More money to invest?
The other vital point is to qualify for the tax breaks, the investor and company both have to keep to a stringent set of rules.
For the investor, that means holding the start-up shares for at least three years.
SEIS is a risky investment, but is an option for sophisticated investors who have used up their ‘safe’ reliefs, such as the £40,000 annual allowance for pensions and the ISA limit.
Investors with more than £100,000 to invest can look at the Enterprise Investment Scheme, a close cousin of SEIS. The tax breaks are similar, but the tax refund comes in at 30% instead of 50%.
Investments are risky, but tend to be companies on at least a second round of funding rather than start-ups.
