Seed Enterprise Investment Scheme (SEIS): What is it?

Lisa Smith, BA (Hons), CeFA
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Due to the perceived higher risks of investing in smaller businesses, and because many venture capital funds only wish to invest in businesses requiring over GBP 150,000, there has historically been an “equity gap” in the UK’s business investment landscape.

With the introduction of Seed Enterprise Investment Scheme (SEIS) legislation, Chancellor George Osborne has addressed this gap – providing the UK’s small businesses with access to investment, and smaller-scale investors with significant tax reliefs to ease risk.

The lowdown

As an SEIS investor, you can invest as much as GBP 100,000 in a business in the first tax year, and in return, the Government will provide you with up front income tax relief of up to 50% of the money invested.

That takes 50% of the risk away (thus reducing your exposure by half) – creating better potential returns, essential capital for businesses and additionally contributing to a booming UK economy.

Then, if the company then succeeds and you make a profit on the sale of your shares, you will be exempt from capital gains tax on the profit.

Whilst this is all good news, it is imperative to remember one of the golden rules of investing: That a person should not invest what they can’t afford to lose. You may want to bear in mind however that if a company does unfortunately fail, you can still offset that loss against your income tax.

In essence, the legislation allows the Government to take some of the sting out of smaller-scale investments by improving returns when the business goes right, and mitigating loss if it goes wrong.

On the flipside of the coin, business are not only being given access to capital to launch and grow their business, but the commercial acumen a seasoned investor can bring to a business.

Aspects to consider: The investor

There are several aspects you need to consider before you begin a SEIS as an investor to make sure you are eligible.

Firstly, you cannot own over 30% of the company – i.e. have a ‘substantial interest.’ In addition, you cannot be an employee of the company, though you may be a Director.

You need to make sure neither of these factors are relevant to your situation for the entire three-year period of SEIS investment. Then, so long as you meet other requirements, you can invest up to GBP 100,000 in the first tax year – and can continue to invest up to GBP 150,000 for a period of three years.

Aspects to consider: The business

If you are a business owner or entrepreneur hoping to benefit from SEIS legislation, you must ensure the following:

  • The company has permanent UK establishment
  • It does not employ over 25 employees
  • It does not have gross assets totalling over GBP 200,000 at the time of the investment.

If these three factors do not apply, your business may be eligible for SEIS investment – thought you may want to contact HM Revenue and Customs for advanced assurance that the investor and business are eligible. This is not a mandatory step, but it is recommended.

The next step

To learn more about SEIS legislation, to ensure you qualify as an investor or business, or to begin the process, you should contact an experienced independent financial advisor.

An experienced IFA will not only be able to help you navigate the entire process correctly; but ensure that you remain compliant with the legislation to ensure you maintain all tax benefits.

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