How SEIS works for investors

SEIS is seen as the best way of bridging the gap between personal investors looking for higher returns from their cash and start-up companies desperately needing capital.

SEIS is not for every investor.

It’s not easy to make money from saving with bank interest rates at rock bottom for so long and limits for stashing cash in ISAs and pensions.

While money is safe in a bank account or ISA, inflation takes a bite out of the returns.

But personal savers are not the only ones suffering. New businesses need cash to thrive and grow, but the state of the world economy has throttled the supply of money to invest.

Banks are lending less because central banks are propping them up with cheap money from quantitative easing, which is only just showing signs of coming to an end.

That’s where the Seed Enterprise Investment Scheme (SEIS) comes in.

Bridging the gap

The scheme is best-suited to well-off investors who have maxed out ISAs and pensions but have money left that they can afford to lose if the deal goes wrong.

SEIS does lower the risk of direct investment  – and here’s how it works:

Investors can buy shares worth up to £100,000 a year in SEIS companies. HM Revenue & Customs offers an income tax refund of up to 50% of the amount invested up-front.

If the company is a winner and the shares are sold, any profit is free of capital gains tax (CGT).

How SEIS tax relief is calculated

But if the company fails and the shares are worthless or sold at a loss, many investors can set off the loss against income tax.

For example, if someone earns £50,000 a year, they would expect to pay income tax of around £8,300.

If they invested £12,000 in a SEIS company, the tax relief would be £6,000, reducing their income tax in the year to £2,300.

If the shares were sold for £20,000, then the £8,000 profit would be tax-free because no CGT is due, but if the company bombed and the £12,000 was lost, the investor could still set off £6,000 against income tax at their marginal rate – ie £2,400 at 40%.

Overall, SEIS lowers risk for investors from all the money for an investment outside SEIS to around 28% of an investment.

Find out more about SEIS

You can download a copy of the SEIS Guide here. The guide is divided into a section aimed at investors, and one targeting entrepreneurs. It is the first port of call for those looking to enter into a scheme which has seen incredible growth in popularity in the last few years.

The guide is downloadable from SEIS.co.uk , and provides an easily digestible source of vital information for anybody who could benefit from the scheme.