The Seed Enterprise Investment Scheme offers some of the best tax breaks around – even though Chancellor George Osborne has cut back some of the advantages in Budget 2013.
SEIS is all about raising funds in a difficult market for fresh businesses with good ideas that need funding to come to fruition.
That funding is not easy to find in business environment where banks have locked most of their cash in their vaults in fear of rainy days and private investors are seeking top returns.
To compensate, Osborne launched SEIS in April 2012 with a host of market leading tax benefits.
SEIS rules
He has tinkered under the bonnet in Budget 2013, so here’s a look at how SEIS stands for investors in the tax year starting April 6, 2013:
First, to attract SEIS funding, the company must be:
- No more than 24 months old
- Employ 25 or less
- Have no more than £200,000 balance sheet assets
- Meet ‘qualifying trade’ rules
To gain full advantage from the investment, the investor should be:
- A UK taxpayer
- Must hold 30% or less of the SEIS company’s shareholding
- Can invest a maximum £100,000 in a tax year
- Leave the money in the SEIS company for at least three years
SEIS tax breaks
In return, Osborne will hand over some of the most generous investment tax breaks available anywhere:
- 50% reduction on total income tax liabilities up to a maximum of £50,000 – half the maximum SEIS investment and regardless of the tax rate paid by the investor
- 50% capital gains tax exemption on assets sold to raise the cash for the SEIS investment – the money must be reinvested in the SEIS in the same tax year as the sale – reinvesting £100,000 from a gain will save £14,000 in CGT
- If the investor sells their SEIS shares after three years, the gain is CGT exempt
- If the SEIS company goes bust, the loss can be set off against income tax at the taxpayer’s marginal rate
So what does that mean in cash terms to an investor?
The tax saving on a £100,000 investment is a £50,000 income tax reduction
If the investment was raised from selling other assets, the CGT saving is £14,000, adding up to £64,000 relief on the total investment.
The return on selling the shares depends on the success or failure of the company.
If everything goes well, any gain is CGT exempt. If the company fails, the loss relief adds up to £22,500 for a top rate 45% taxpayer – which added to the £64,000 original investment relief comes to £86,500.
In a worst case scenario, the SEIS protects 86.5% of the investment, presenting a significantly lower risk than many other investments.
