Seed Enterprise Investment Scheme Summary

Seed Enterprise Investment Scheme, SEIS or Seedeis was created after the fallout from the global economy and the banking scandal has left small, early stage businesses unable to enjoy the same growth that bank loans once afforded them.

The Seed Enterprise Investment Scheme enables investors and small businesses to connect financially with excellent tax incentives for the investor. Launches by the British Government in 2012, SEIS arrangements offer some great incentives to prospective investors with relief on income tax, capital gains and inheritance tax.

Even though this scheme is incredibly appealing for those who want to invest a small amount of money, it should also be approached with some modicum of caution. As with most investments, there is some risk involved. The small business may not meet its potential and all or some of the invested money could be lost.

Who is Eligible to Invest?

The SEIS is open to all investors, without any exemptions on whether they are UK citizens or even resident in the UK. However, there are some restrictions in place that include:

  • Employees of the same company may not invest in it through SEIS. If you are a director of the company, then you may invest but only if you own less than 30% of shares or interest in it.
  • You must not receive any benefits from the company during the 3 year SEIS qualifying period such as dividends, expenses or other remuneration.

How Much Can Be Invested?

Investors are generally recommended to put a few thousand pounds into an investment of this type to enjoy the full benefits and for it to make economic sense. Anything less may not make sense as there will be some cost when it comes to the advisory process. However there is no minimum amount set, however independent financial advisors (IFAs) may set their own minimums.

On the other hand there is a maximum amount that you can invest into a SEIS during one tax year. This limit currently stands at £100,000 per financial year, and can either be invested into one company or can be spread across many.

How Does a Company Qualify for Investment Through the SEIS?

Companies who qualify for the Seed Enterprise Investment Scheme will be able to benefit from the funding that is needed in order to grow. However, there are some fairly stringent rules when it comes to who actually does qualifies for this investment type. In order to qualify the company must:

  • Be registered in the UK with a permanent base in the UK.
  • Have been in business for no more than 24 months
  • Not have more than 25 full time employees, if the company is part of a group then the group must not have more than 25 employees.
  • Be operating in an approved and qualifying sectors. Qualifying sectors are varied, and finance is not one of the qualifying sectors.

How to Invest

SEISs are very much niche financial products that are not generally marketed by banks or building societies. Even IFAs may choose not to recommend clients to make this type of investing, unless they feel that it will really help them financially to invest into a start-up company.

If you personally know a business that qualifies for SEIS and they need seed capital, then you may recognise a good opportunity to invest. However, ensure that you take financial advice from an independent advisor prior to committing to invest any money.

Benefits to Investors

Return on investment: It is not possible to predict what the return might be on any SEIS investment. Start-ups can go either way and they need to prove themselves over a sustained period of time. The returns could be absolutely spectacular or you could experience an absolute loss. Take your time to decide whether the company that you want to invest in is the right one for you.

Income Tax Relief

Investing in a company that qualifies for SEIS, along with having a UK tax liability will mean that you will be eligible for income tax relief. To take advantage of this, consider these rules:

  • Relief will be given at 50% of the cost of the shares that you now hold in the start-up. There is a maximum annual investment limit of £100,000 per tax year.
  • In order to enjoy the relief, you will need to hold the shares for 3 years from the date of issue. Relief could be reduced or even fully withdrawn if you dispose of the shares for any reason before the three year period is up, or if any of the qualifying conditions can no longer be met during that period.
  • Income tax relief cannot be applied to any credit or dividend income.
  • No matter what tax rate you pay, you will still enjoy the 50% relief in the tax year that you invested in a SEIS.

Capital Gains Tax

In addition to the tax relief from investing you can also enjoy a Capital Gains Tax (CGT) reduction. You will need to hold your shares for 3 years to qualify for this and it could be up to 28% of deduction.

Other Points to Consider

Although the company that you invest in could go bust, they could also thrive and grow into a company that returns your money to you and even doubles it or better. However, there are still some potential pitfalls when it comes to putting your money into a SEIS, for example:

  • Start-up investments are considered a high-risk type of investment. Although some businesses will succeed at growing and meeting their goals, others will not. There is no protection against losing your money, but you will still be able to enjoy the tax relief if it does all go to pot.
  • Once you invest your money, you will no longer be able to control when you have access to it. You will only be able to access it when all the investor agree to either sell or dispose of the business that you chose to fund.

SEIS Scheme Essentials

  1. In response to the demand for small, early stage British companies needing investment, the SEIS or Seed Enterprise Investment Scheme was launched in 2012.
  2. Investors in SEIS qualifying companies receive significant tax incentives such as income tax relief, Capital Gains Tax relief and Inheritance Tax relief.
  3. Investors don’t have to be UK residents or even citizens. The scheme is open to anybody who wants to invest to fund the growth of British small businesses.
  4. Employees of qualifying companies cannot invest, nor can directors who own or hold shares for more than 30% of the company.
  5. The maximum that can be invested through this channel is £100,000 per tax year. However, you can invest in more than one company each year.
  6. You will be eligible for income tax relief of up to 50% of your investment if you make your investment into a qualifying SEIS company.

Seed Enterprise Investment Scheme Advice

If you are interested in the Seed Enterprise Investment Scheme as either an investor or an entrepreneur, then you will need specialist advice. You can find out more about the scheme and also register for further information at the Seed Enterprise Investment Scheme

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