Seed Enterprise Investment Schemes (SEIS) are a new initiative designed to encourage investment in small, early-stage companies. Investors are offered a better range of tax reliefs than the longer standing Enterprise Investment Scheme (‘EIS’) including income tax relief on their investment of up to 50%.
Early stage companies have particular difficulties in raising finance and the tax benefits of SEIS recognise this, the aim being to encourage more investment.
The tax benefits
Providing the investor purchases new shares, income tax relief of up to 50% is available, reducing the net cost of a £10,000 investment to £5,000. Tax relief is granted up front however shares have to be held for 3 years to retain this qualification. It is important to note that investor’s cannot reclaim more UK tax than has been paid, which is of particular relevance to ex-pats.
The fund grows free of capital gains tax and existing capital gains can be deferred and rolled over into the SEIS. There is also an inheritance tax (IHT) benefit in that SEIS qualify for business property relief and therefore an IHT exemption once held for 2 years.
The risks
The tax benefits of SEIS also acknowledge the risks of investing in early stage companies, where losses and business failures are common. Furthermore unquoted shares (those not listed on a recognised stock market) in early stage companies have poor liquidity, meaning they are often difficult to sell.
For these reasons investors should be careful of allowing the tax incentives to dominate their decision making. The tax relief certainly reduce the risk and soften any blows, however, SEIS are high risk and for sophisticated investors, who understand the risks and have the capacity to suffer large losses if needs be.
Venture Capital Trusts
One alternative to SEIS is to invest in Venture Capital Trusts (VCTs). These are still high risk investments into small companies, but tend to be in slightly better established businesses. The risk of default is lower and the tax benefits different to reflect this. Income tax relief of up to 30% is available capped at an investment of £200,000, assuming sufficient UK income tax is paid. This is combined with no capital gains tax on gains or income tax payable on the income distributed.
For more information on VCTs please go to www.hl.co.uk/vct
This is a guest article, kindly written by:
Danny Cox CFPCM FPFS
Hargreaves Lansdown
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