The Seed Enterprise Investment Scheme has a lot to offer entrepreneurs wanting to fund start-ups and investors looking for the next big thing
The Seed Enterprise Investment Scheme (SEIS) offers tax breaks to investors willing to take a chance by putting money in to a fresh business that has little or no trading history or track record.
Many would consider the investments high-risk – but many investors will counter that with high risk come greater returns.
Investors can only put £100,000 into SEIS in any single tax year.
They have options to invest – for instance, through a SEIS fund manager who will buy shares in companies looking for money for them or by buying shares directly.
Crowd funding
Family and friends can invest as well as entrepreneurs, but some of the rules are different.
A popular way of SEIS investing is ‘crowd funding’, which is when a number of investors stake a small amount of money each to fund a larger project as a group.
This reduces the financial risk for each member of the funding syndicate.
Those tax breaks really help as well.
First, investors pick up 50% income tax relief on an amount equivalent to what they have invested, up to the maximum £100,000 in a tax year.
Then, if the shares are sold at a profit, no capital gains tax is due. To benefit from this, investors have to hold their shares for a qualifying period of three years.
Another tax benefit is capital gains tax relief of 50% when reinvesting certain gains made in the 2013-14 tax year in to SEIS.
Although these are an outline of some of advantages for investors, not all companies qualify for SEIS investment.
Added value investors
The firm must not have more than £200,000 of assets on the balance sheet, must not employ more than 25 people, must be less than 24 months old and can only take part in certain trades.
Investing in SEIS is much like how investors work in the BBC TV programme Dragons Den.
New businesses that find funding difficult to raise through banks can search out willing investors.
Some investors might come with added value with connections or skills that improve a business. Others might just be looking for a higher return on their money than they can find elsewhere.
As a business owner, the risk is handing over up to 30% of your company to an investor – and 30% of any profits you may make further down the line.
Of course, without that investor, your business plan might sit on the back burner and never become a reality.
This is a quick guide to SEIS and not detailed investment advice which does not include information about all the tax issues involved for investors.
