The Seed Enterprise Investment Scheme, also known as the SEIS or the Seed EIS, offers fantastic tax efficient benefits to investors while simultaneously encouraging investment in early stage start-ups in the UK. This invaluable sector is regarded as being integral to the economic growth of the UK.
Initially introduced as a concept in 2011 by the Chancellor George Osborne, SEIS went ‘live’ the following year to give young entrepreneurs the chance to find investment when bank support, loans and start-up cash flow was not forthcoming.
After two positive years, the Government announced in 2014 that the Seed Enterprise Investment Scheme would be a permanent fixture. Since its introduction, the scheme has raised in excess of £82 million worth of investment in start-ups across the UK, and over 1,100 new businesses have sourced funding.
SEIS offers an investor tax breaks which are amongst the most favourable in Europe. With the extensive array of benefits on offer, the usually high-risk idea of investing in start-ups is turned on its head. Such are the savings on income tax and CGT, even if the invested business were to fold in the first two or three years, losses can be offset in order to minimize the impact.
Alternatively, if the company becomes a success, the tax benefits are still received as well as a tidy return on investment. As a result, many professional investors and consortiums are turning to SEIS-qualifying businesses as their preferred investment choice.
The five primary incentives are:
- Income tax relief equating to 45% of the investment
- Capital Gains Tax (CGT) exemption on any proceeds made from investment
- CGT relief on any profits which are re-invested
- Relief against losses in the event of a company folding
- Inheritance Tax (IHT) Relief
The combination of IHT and CGT relief makes the scheme one of the most attractive options in the UK.
Income Tax Relief
By reducing your income tax by 45% of the amount you invest, you are essentially halving your investment therefore reducing your exposure. There are no exclusions to this relief and you can also split it across your current and previous tax years.
CGT Exemption on Profits
After your three years of investment, you can decide to sell your shares. You will be exempt from tax on any gains you have made.
CGT Relief on Re-Investment
If shares are sold in any investments in and placed into an SEIS-qualifying business, there is 100% relief from CGT in the first year, with 50% given in year two.
With the relief offered by the Government if a company should fail, investors are able to offset their losses against other income. The losses are offset at the level of the individual’s highest income tax rate. The level of investment (minus the 50% income tax relief) is then multiplied by the tax rate and the amount is returned to the investor.
Inheritance Tax due against the value of the shares will be reduced to zero after two years from the date of initial purchase.
If your relief puts your income tax at zero for the current year, you have the option to then carry-back any surplus relief to the previous year.
There are a variety of criteria which must be met by any company looking for investment. It is imperative that due diligence is undertaken on any potential investment opportunity to ensure that it qualifies for the scheme in order to benefit from the tax breaks.
If the company is compliant at the time of investment, and continues to remain compliant throughout the first three years, the tax benefits can be claimed.
HMRC provide something known as Advanced Assurance, which is a statement that confirms the business is SEIS compliant at the time of investment.
Seed Enterprise Investment Scheme Criteria
The main criteria which must be met in order to benefit from the schema re as follows:
- Investor must hold shares for minimum of 3 years
- Company must remain SEIS compliant
- Investor must be over 18
- Maximum investment is £100,000 per investor per year
- Maximum equity stake in company can only be 29%
- SEIS not to be used for tax avoidance purposes
- All shares must be bought in cash and paid for in full
- Investor cannot be employed by company or connected unless as a (non-exec) Director
Methods of Investment
There are three ways to become involved in an investment opportunity through the Seed Enterprise Investment Scheme.
Sourcing your own investment opportunity, carrying out due diligence personally to ensure qualification, and of course forgoing the need to pay fees to a platform in return for a piece of the action.
As a member of a platform, you will be presented with investment options to take advantage of, and while all due diligence will be carried out on your behalf, your investment will be subject to charges which can sometimes be expensive.
Investment or Fund Houses
In a similar way to platform investment, using a fund house will often incur entry and exit fees as well as an annual charge. Financial advisors often choose these funds as it offers their clients the opportunity to diversify their portfolio.
Entrepreneur & Business Owner Insight
Seed Enterprise Investment Scheme legislation provides a scheme that gives small ‘start-up’ companies an ideal route into investment.
SEIS offers entrepreneurs the opportunity to share their risks while simultaneously linking up with investors that may also be able to add value in other areas of the business moving forward.
The first benefit is access to capital. This has always historically been a huge challenge for the majority of start-ups. Sourcing initial funding is a painstaking operation full of rejection, however with SEIS, investors are more forthcoming due to the reduced risk they receive through the scheme.
There is also the possibility that the investor will offer business advice or other benefits to assist with the growth of your business, although this doesn’t come as part of the deal.
These are two potential benefits that you won’t find in a bank or lender, but to be able to qualify for SEIS funding there are certain criteria to which you must adhere.
The Company Criteria
- Must be within a qualifying trade
- Must be established within the UK
- Must be fully independent
- Must be unquoted before beginning SEIS process (not listed on stock exchange)
- Cannot have assets over the value of £200,000
- Must be under 2 years old
- Must have less than 25 employees
If you want to find out whether your business qualifies, you can make the initial approach to your Small Company Enterprise Centre (SCEC) to enquire.
The predominant area of appeal for any investor will be the tax relief they benefit from via investment. To qualify for the tax reliefs they must invest in a company that qualifies for the scheme. An investor is unlikely to want to place funds into a business that either does not qualify, or is unsure if they qualify.
HMRC operates an Advanced Assurance facility which certifies that the company in question meets the criteria necessary to qualify for the scheme. With this certificate, a business will have more chance of finding investment.
Ways to Attract Investment
Because of the unparalleled incentives offered to investors, the SEIS legislation should make it far easier for a start-up or small business to source the capital required for growth, there are three ways to do this, seeking personal investment or by applying to a platform or fund house.
Spending Funds Raised Through Seed Enterprise Investment Scheme
The legislation dictates that money raised must be spent on a ‘qualifying business activity’. This is defined as an activity within the following:
- Carrying out a qualifying trade
- Preparing to carry out a qualifying trade (set-ups and acquisitions are included)
- Researching and developing a qualifying trade
- Hiring staff
Seed Enterprise Investment Scheme is widely acknowledged to be one of the most pivotal legislative measures introduced in Britain to encourage growth.
The benefits for both investors and entrepreneurs are substantial, and as the scheme becomes more established and grows in popularity, it is extremely likely that many of Britain’s brightest young businesses will have SEIS to thank for getting them off the ground.
For more in-depth information on the scheme, advice and examples download the Guide to Seed Enterprise Investment Scheme