Investing £10,000 In A SEIS Risks Just £200 Of Your Cash

High earners looking for a way to offset an investment against tax should look at a little known scheme which delivers up to 98% relief for the wealthiest investors.

The innovative Seed Enterprise Investment Scheme (SEIS) is a slight variation on the better known Enterprise Investment Scheme (EIS).

The idea is to generate investment in small but high risk start-up ventures looking for capital.

With SEIS, investors can claim their investment against income tax and avoid capital gains tax (CGT).

But this new version of EIS excludes firms which have already raised cash under the scheme and those which have been incorporated for more than two years.

How a SEIS investment works

HM Revenue and Customs (HMRC) also have some other rules about which SEIS companies would qualify, such as having more than 25 employees, and the investor can only invest a maximum of £100,000 in a year. The shares must also be held for at least three years – but any profits when they are sold are exempt from CGT.

Here’s how investors can sink £10,000 in to a start-up business but only risk £200 of their own cash.

However, investors should take professional advice before risking their cash as these tips are not suitable for everyone.

• Invest £10,000 and there is tax relief of 50% – regardless of your marginal rate but you must have paid enough at least £10,000 in income tax to make the claim
• If the investor realises a gain of £10,000 then £2,800 would be due in CGT. However, investing that sum into a SEIS means there is no CGT to be paid – whereas under an EIS the CGT is usually deferred
• The profit from a SEIS is usually tax free and a loss can be set off against income tax at the investor’s marginal rate
• Should the company go bust and the investment lost, the investor can claim tax relief against the amount that didn’t get tax relief. In this example, that is the £5,000 that wasn’t claimed against income tax.

Just £200 at risk

Essentially, an investor paying a marginal tax rate of 40% who is looking at investing £10,000 with a SEIS would only really risk £200 of their money because they will claim £5,000 upfront against income tax, the £2,800 CGT which is exempt and another £2,000 saved against income tax should the company go bust.

Using SEIS is becoming increasingly popular as advisors and investors learn more about the scheme to not only mitigate tax liabilities but also it provides an excellent investment opportunity for start-ups.