SEIS – Tax breaks for investors explained

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The Seed Enterprise Investment Scheme (SEIS) comes with some of the most generous tax breaks for investors willing to take a chance by staking their cash with start-up companies.

Although the risks are high for any new business, with most fledgling companies going to the wall within five years, for those that survive the early years, the reward is often a stellar return for investors.

SEIS is aimed at attracting capital for start-ups without weighing down the company with debt and comes with a cluster of tax breaks that are triggered on entering and exiting a start-up investment:

50% income tax refund

Every investor can claim the relief, regardless how much they are investing in a SEIS company or the rate they pay tax  up to a maximum of £100,000 in a tax year.

Carry-back allows investors who buy shares in one financial year to treat the purchase as if it happened in another, which gives more scope for tax planning.

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The refund allows investors to cancel out rather than defer income tax paid of up to £50,000 on a maximum investment of £100,000.

Capital gains tax relief

Any growth in the value of a successful SEIS company shares held for 36 months or more is tax-free

Loss relief

If SEIS company shares are sold at a loss, an investor can write-off the amount lost against income tax or CGT.

To calculate loss relief, subtract tax relief from the investment.

For example, a £100,000 investment attracts 50% tax relief (£50,000) already claimed as an income tax refund, leaving £50,000 to write off against loss relief, assuming the SEIS shares have no value.

Inheritance tax relief

Often overlooked, by effective for estate planning, SEIS comes with IHT relief.

Business relief on the shares after they are held for two years will make any SEIS investment exempt from IHT.

The shareholder can give the shares away free of the threat of IHT providing the recipient keeps them until the person making the gift dies.

To claim the tax breaks, a SEIS investment must run for at least 36 months.

If an investor leaves the scheme before the qualifying period ends, HM Revenue & Customs can reclaim or withdraw any tax breaks in full.

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