The Seed Enterprise Investment Scheme (SEIS) is so important to new businesses because offering equity finance is much less risk for the business and investors than taking on debt.
SEIS directors are also more likely to get someone to work with who understands their financial return depends on the financial success of the business and without SEIS they are unlikely to see their money back if the firm fails.
Giving away an equity share also helps entrepreneurs make vague business ideas a reality when a bank or specialist lender would not be able to see past the vision rather than the numbers embodied in the project.
SEIS tries to combine the best of both worlds for entrepreneurs and investors.
SEIS tax benefits
For companies, the scheme is access to £100,000 of direct funding with any debt finance issues, like capital and interest repayments out of working capital during the research and development phase of a project.
For investors, SEIS offers some of the best investment tax breaks they can find anywhere.
They include:
- A 50% reduction income tax paid in the year or carried back to the previous year
- A 50% reduction on capital gains tax charged against assets sold to raise money for the SEIS investment
- The value of the equity stake growing free of capital gains tax
- Loss relief against other income should the SEIS company not succeed.
SEIS also offers an exit route after three years – when the company can graduate to the Enterprise Investment Scheme (EIS) or the investor can collect their tax breaks and say goodbye by selling their shares exempt from capital gains tax.
Funds for start-up ideas
Another advantage of SEIS for an entrepreneur is they often have the ideas but lack the practical business experience to make them work.
The likelihood is a SEIS investor is more hands-on than a debt financier and will offer advice and assistance to ease the transition of the company from start-up to a fully-fledged business.
So far, nearly 2,000 companies have benefitted from almost £2 billion in equity cash since Chancellor George Osborne introduced SEIS in his Budget 2013.
The intention was to provide start-up funds for ideas that would not gain bank finance – and SEIS has shown investors have the appetite to bridge that gap.
Making an investment is easy – either directly buy equity in a HM Revenue & Customs (HMRC) approved SEIS company or units in a specialist fund that invests across a number of SEIS firms.
