Investing in startups with the Seed Enterprise Investment Scheme (SEIS) is not just for the wealthy, says the tax man.
While the scheme offers some of the most generous tax reliefs available anywhere in the world, not enough small investors are staking cash, according to HM Revenue & Customs (HMRC).
HMRC has released a detailed statistical analysis of investment in SEIS and the big brother Enterprise Investment Scheme (EIS).
Although the document shows £80 million has gone to more than 1,100 companies, the average investment is far short of the £100,000 maximum in a tax year.
“The research shows that the average investor claiming income tax relief puts less than £20,000 into companies that have preapproval as qualifying for SEIS,” said an HMRC spokesman.
Finding a SEIS company
The figures show that this accounts for around two-thirds of SEIS investors.
With the tax year end fast approaching and many investors with cash to spare after using their annual ISA and pension contribution allowances, SEIS is a good place to look for a final tax boost.
One problem for investors is no one publishes a central index of companies looking for SEIS investment, so investors have to look long and hard for opportunities.
The best places to look are popular crowdfunding platforms and business angel new web sites.
Some fund managers also run specialist SEIS/EIS ventures.
SEIS offers investors some mouth-watering tax breaks to temper the risk of staking cash in a startup.
In the first year, investors can reclaim income tax paid up to 50% of the value of their investment – so £20,000 in means £10,000 knocked off any income tax owed for the year.
CGT reliefs
Even better, the reduction can be carried back a year if the investor can better offset the tax.
Along with the income tax reduction comes a capital gains tax exemption.
For the current tax year, ending April 5 2015, investors are entitled to a 50% reinvestment relief on assets sold to raise the cash for buying a SEIS company’s shares.
Later down the line, if the three year investment flies, then any growth in value of shares is free of capital gains tax.
If the company bombs, loss relief to offset against tax paid on other income is also available.
Many investors tend to look at technology companies (32%), while more than half of all startups attracting SEIS investment are based in London and the South East (52%).
Investments through crowdfunding platforms like Seedrs and Crowdcube are as low as £10, meaning really anyone can benefit from the SEIS tax reliefs.