The Seed Enterprise Investment Scheme (SEIS) is an ideal way to invest surplus end of year cash for investors who are looking at how to reduce their tax bills.
SEIS is a government-backed tax break for investors ploughing money into startups.
For investors looking at ways to minimise the income tax they are paying at the end of the tax filing season, SEIS is one way of reducing the bill.
A SEIS company will already have passed through a pre-approval process with HM Revenue & Customs (HMRC) that guarantees the scheme’s tax breaks are available providing the company keeps within the qualifying rules for three years.
Once an investor has a copy of this pre-approval certificate from the company, they know that they can pick up a tax reduction equivalent to 50% of the cash invested in an equity stake in a SEIS company up to a maximum £50,000 for investing £100,000.
Tax breaks
This tax perk is available at the same rate to any SEIS investor, regardless of whether they are basic or higher rate taxpayers.
Investors need to keep a watch to make sure the startup sticks to the SEIS rules or HMRC can claw back any tax relief.
SEIS does not only offer income tax relief but other tax breaks as well.
SEIS investors who sell other assets to raise the cash for their equity stake can gain 50% relief on capital gains tax.
Meanwhile, they pay no capital gains on any growth in the value of their stake in the SEIS company.
CGT and loss relief
But investors should beware that in the unlikely event of them drawing a dividend from the startup during the SEIS period, income tax will be due on the payment.
On exit from the SEIS, another overlooked but valuable tax benefit is loss relief.
Should the startup fail and the value of the investor’s stake decrease, this relief covers the loss, which can be offset against other income.
Taken together, SEIS offers a cheap entry into startup investment.
Anyone buying into a SEIS company effectively gains their shareholding at half-price thanks to income tax relief and any profits are free of capital gains tax.
