Young businesses have always had problems raising money, but they are finding this particularly hard now as the banks are lending even less and other investors are hard to find.
To try to resolve their problems, the government devised a new tax break to lower the risk for investing in a small start-up business.
The Seed Enterprise Investment Scheme or SEIS is aimed at raising funds for new small businesses with bright ideas but no cash to take them forward.
If a company is
- Less than two years old,
- Has fewer than 25 employees
- No more than £200,000 in assets
- Undertakes a qualifying trade
Then, the business could be eligible for SEIS funding.
SEIS tax breaks
The tax breaks can make a company a better proposition for investors as the program significantly reduces risk and raises returns.
SEIS is similar to the long-running Enterprise Investment Scheme (EIS), but with some significant differences:
- Investors enjoy income tax relief of 50% on their investment regardless of their marginal tax rate
- Investors avoid capital gains tax (CGT) on assets sold in the 2012-23 tax year, as long as they reinvest the gain in a SEIS eligible start-up in the same tax year
Like the EIS, the investment avoids capital gains tax if the company is sold for a profit after three years or more.
If the company goes bust, investors can claim loss relief at their marginal income tax rate on any investment that has not already received income tax relief.
How SEIS works
As an example, on a SEIS investment of £100,000, the maximum allowed for each tax year, an investor would pick up a £50,000 income tax liability reduction. If they raised the investment from the sale of other assets, £100,000 is exempt from capital gains tax if reinvested in to a SEIS, saving £28,000 of CGT.
If the investment failed, they could offset £50,000 of losses against any income tax liability potentially saving a 45% taxpayer £22,500. This gives a potential total tax relief of £100,500 on an investment of £100,000.
If the company succeeds, and the investor applies the full income tax and CGT reliefs on the £100,000 investment, they immediately save £78,000.
Assuming the company is sold three years later for twice the value of their investment, giving a gross return of £200,000, the investor would normally pay 28% CGT on the gain of £100,000, netting them a return of £172,000. That’s investing outside SEIS.
Through a SEIS, after income tax relief of £50,000 and capital gains tax relief of £28,000, they have effectively invested only £22,000 for a return of £200,000, giving a 72% profit against a SEIS profit of 809%.
SEIS rules
Not all companies qualify for SEIS funding. The rules include:
- The company must be undertaking or getting ready to undertake a new qualifying trade and not all trades qualify. The HMRC website as a list of rules.
- The company can only receive £150,000 of SEIS funding
- A SEIS shareholder can only take up to 30% equity in a company
SEIS is an interesting investment option for start-up companies looking for funding to kick start their business – and for investors looking for a maximum low-risk return on their money.
