The Seed Enterprise Investment Scheme (SEIS) is a government-backed tax incentive aiming to help small startup companies raise finance from investors in return for an equity stake in the business.
Chancellor George Osborne introduced SEIS in his Budget 2012.
SEIS started on April 6, 2012 and by the end of the 2012-13 tax year, 1,120 companies had raised £83.7 million from almost 5,000 investors through the scheme.
Osborne introduced SEIS as an alternative finance source for entrepreneurs as the banks withdrew from the startup finance market after the downturn.
SEIS recognised startups were high risk and poorly funded, so to attract much-needed capital, investors were offered tax relief at a much higher rate than other business finance schemes, such as the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT).
Companies are expected to raise first-round investment through SEIS and then to move up the ladder for further funding through EIS.
SEIS tax reliefs for investors
Investors pick up tax relief on entering and leaving a SEIS, providing the company has met the qualifying rules throughout the three years the scheme runs.
The maximum SEIS investment in any tax year qualifying for tax relief is £100,000, although investors can input up to another £50,000 into a company during the three-year SEIS term.
A minimum investment is not set in SEIS rules, but most companies seeking startup finance on a crowdfunding platform look for at least a £500 investment and managed funds for £1,000.
The entry reliefs are
- A reduction in income tax based on the level of investment
- A capital gains tax (CGT) relief against assets sold to raise the money invested in a SEIS. This is a relief where the rate is renewed in each Budget, so keep an eye out for changes.
The exit reliefs are:
- Capital gains tax exemption on the growth in the value of a SEIS holding
- Loss relief against income tax due on other earnings if the SEIS fails
Here are more details about each of the reliefs:
SEIS investors must have a UK tax liability to offset income tax relief, but do not have to live in the UK, which opens SEIS to expat investors.
Tax relief is given as an income tax reduction of 50% of the cost of the SEIS shares up to an annual investment limit of £100,000.
The claim for relief has a window of five years following January 31 in the tax year after the shares were purchased.
Income tax relief can be carried back a tax year starting from 2013-14, but the rate of relief is that of the earlier year.
Here are some examples of how SEIS income tax relief works:
- Kelly buys SEIS shares worth £30,000 in the 2012-13 tax year. Her tax relief is 50% of £30,000, or £15,000. She owes income tax for that year of £17,500, so after deducting the relief, she owes £2,500 income tax.
- Carl buys £60,000 of SEIS shares in the 2012-13 tax year. His tax relief is 50% of £60,000, or £30,000. He owes income tax for that year of £22,500. Carl’s tax bill is reduced to zero but he loses the remaining £7,500 relief.
CGT reinvestment relief
Reinvestment relief is aimed at helping investors shift their cash out of one asset class into SEIS.
To claim the relief, investors must sell one or more assets and reinvest some or all of the money in the same tax year. Only the SEIS investment amount from any disposal qualifies for relief.
Investors have 50% of the value of the reinvestment exempt from CGT.
Some points to watch:
- The disposal does not have to take place before the reinvestment – the relief applies providing they both happen in the same tax year.
- If investors take advantage of carry-back relief for income tax, then the same year’s SEIS CGT relief reinvestment rules apply as well.
Here are some examples of how SEIS CGT reinvestment relief works:
- Kelly sold shares to raise the cash for her £30,000 SEIS investment. The chargeable gain was £90,000. Her CGT exemption is £30,000 because she has up to £45,000 of the gain available to reinvest but chose not to use the full exemption. CGT is payable in the usual way on the rest of the gain.
- Carl also sold shares to fund his £60,000 SEIS investment. His chargeable gain was £120,000. He can claim relief on the entire £60,000 as 50% of the gain.
CGT disposal relief
Providing the original SEIS investment received income tax relief and the shares have been held for three years, on disposal of the shares, any chargeable gain is CGT free.
Loss relief comes into play if a SEIS investment fails and decreases the risk for an investor.
This is how SEIS loss relief works:
Kelly has an initial SEIS investment of £30,000.
Her initial income tax relief was £15,000.
Her loss relief is calculated as 50% of the investment multiplied by her marginal tax rate, which happens to be 40%.
The calculation is (£30,000 – £15,000) x 40% = £9,000.
So the maximum she stands to lose if her SEIS turns sour is £9,000.
Claiming tax relief
As a SEIS investor, as part of due diligence before committing to buying shares, ask to see a copy of the pre-approval certificate issued by HMRC – then call HMRC to check the details are genuine.
The advanced assurance paperwork means a SEIS application has gone to HMRC and that the tax office has agreed the company qualifies to offer the scheme tax reliefs to investors.
Next, investors cannot claim tax relief until the company has traded for four months or has not traded but has spent at least 70% of the capital raised through the SEIS.
At this stage, the company should submit a Form SEIS1 to HMRC to confirm active participation in SEIS.
HMRC then returns a Form SEIS3 for each investor to the company, which should pass them on to shareholders.
Don’t forget if the company fails to qualify for SEIS for three years, HMRC can claw back any tax relief claimed by investors.
HMRC administers SEIS through the Small Companies Enterprise Centre.
Call 03000 588907 or write to
Small Company Enterprise Centre Admin Team
PO Box 3900
Investing in SEIS
It’s probably fair to say that Britain is leading the way in offering tax incentives to invest in small business startups.
The tax advantages of investing in a SEIS outstrip any other reliefs available in Britain and other developed economies.
If you are looking to make a SEIS investment you have two options:
- Direct investment into a company – This is popular with investors specialising in particular markets or businesses but does not come without risk.
Investors can find they are overexposed to one market and that the company may need more time or capital to stay on track.
In this type of SEIS, the investor will want board representation to keep a close eye on how the company is run.
- Managed funds – Investors put cash in to a fund which has a professional manager and a diversified portfolio that spreads risk over several market sectors.
The investment makes no call on time or additional capital.
Managed funds are offered by specialist financial firms or through investment platforms.
- Crowdfunding – Many crowdfunding platforms offer a facility to wrap investments in a SEIS. These are typically highlighted with an icon on the platform.
Finding a suitable SEIS investment takes some digging as no central online directory of companies putting a call out for startup finance is available.
Investors seeking a place to shield their money from tax and grow their wealth can use the directory at the end of this guide as a starting place to find SEIS opportunities.
SEIS facts and figures
HMRC has issued some helpful statistics about SEIS that show the number of investors, how much they are investing and what type of businesses are receiving the cash.
The figures apply to the 2012-2013 tax year.
The data shows that technology and business are by far the most popular investments – taking £45 million of the £83.7 million invested in the year – which amounts to 53% of the cash staked in SEIS during the tax year.
Also, more than half of all SEIS companies managed to attract at least £100,000 in funding.
[table id=1 /]
Note: Figures are rounded to the nearest five companies and £0.1m, which accounts for any discrepancies in rounding the totals
As the tables show, SEIS is a popular tax break for investors, and as a result dozens of crowdfunding and investment platforms offer entry to the market.
The lowest stakes are probably available through crowdfunders.
Here’s a list of some places to look for companies seeking SEIS funding:
- Funding Circle
- Bank to the Future
- Mercia Fund Management
- Jenson Funding Partners
- Blackfinch Investment Solutions
- Deepbridge Capital
- Enteprise Investment Partners
- Guinness Asset Management
- Ingenious Investments
- MMC Ventures
- Octopus Investments
- Oxford Capital Partners
- Parkwalk Advisors
- RAM Capital Partners
- Rockpool Investments LLP
- Sapphire Capital Partners LLP
- Triple Point
- VN Capital Partners (VN-CP)
Mentioning a financial firm or web site in this guide is not an endorsement of that organisation. This guide is based on the latest information and statistics available from HMRC, but does not constitute investment advice.