SEIS Tax Information
The Seed Enterprise Investments Scheme ("SEIS") offers investors generous tax reliefs for investing in start-up companies. For the most accurate information, please consult HMRC's website on the matter:
For your benefit, we have summarized some of the key details:
Carrying back tax reliefs
Investors can opt to treat their investments has having been made in the previous tax year, if they wish to do so. This means all tax reliefs can then be claimed for that tax year instead. For further details, please consult HMRC's website:
To qualify for the tax reliefs under the SEIS, investors must fulfil certain requirements. Please consult HMRC's website:
The Tax Advantages of SEIS and EIS
The Government has recognised that it is vital for the long-term health of the UK economy that entrepreneurs are able to raise capital to start new businesses which will provide wealth and employment in the future. Therefore the Chancellor announced the Seed Enterprise Investment Scheme (SEIS), which became operational in April 2012. Certain changes were introduced in the 2013 budget.
Under this scheme investors receive the following tax advantages for investments in start-up companies which are raising less than £150,000:
* 50% tax relief against income tax on the initial investment.
* 50% relief against capital gains which is not merely deferred but cancelled. (This was previously 100% for the 2012/2013 tax year)
* No capital gains tax payable when the investment is sold.
* If the investee company fails, even if had yet to commence trading but provided it had a clear intention to do so, the ability to write off the net amount invested (after deducting any income tax relief obtained on investment) against income tax.
* Business Property Inheritance Tax Relief - after 2 years the shares may be passed to heirs without forming part of an estate, and the heirs pay no capital gains tax if these shares are sold.
Investors may use these reliefs in combination. So an investor who has capital gains of £20,000 on which to pay tax may avoid this entirely by investing £40,000 in a company which qualifies for the SEIS scheme. The capital gains tax liability would disappear entirely and, in addition, £20,000 could be offset against income tax.
It is possible to treat the shares as having been issued in the previous year and claim relief in that previous year.
Example: An individual investor with income tax of £25,000 to pay and capital gains of £100,000 in the 2016/2017 tax year on which tax of £20,000 at the 20% rate is due to be paid invests £10,000 in an SEIS qualifying company in 2016/2017:
Investment - £10,000
Income tax bill reduced by 50% of investment - £5,000
Capital gains reduced by 50% of investment (reduced by £5,000), so reduction in capital gains tax due (20% of this) - £1,000
Net cost of investment - £4,000
For higher and additional rate taxpayers, capital gains tax was 28% in 2015/2016 then changed to 20% in 2016/2017. If the above investor also had income tax of £25,000 and capital gains of £100,000 in the 2015/2016 tax year on which tax of £28,000 at the 28% rate had been due then they could choose whether to treat their 2016/2017 investment as having been made in 2015/2016 and claim relief in that year. This would result in a reduction in capital gains tax of £1,400 and therefore a net cost of investment of £3,600.
Provided the investee company has spent 70% of the money invested or has started or intended to trade but fails, tax relief against income tax may be claimed on the £5,000 (that part of the initial investment which was not relieved against income tax - not on the £4,000 net cost).
For a 45% tax payer this relief is worth £2,250
For a 40% tax payer this relief is worth £2,000
For a 20% tax payer this relief is worth £1,000
So for a 45% taxpayer with capital gains tax to pay, the total loss on the investment of £10,000 would be reduced to £1,750 if the investment was made in 2016/2017 and not carried back to the previous year.
The take home message is that the SEIS tax reliefs are generous. The government is serious about wishing to encourage investors to invest in start-ups. Please see HMRC documents for full details of SEIS and EIS tax schemes. Please also note that these are high risk investments and due to the fees charged, if all the investments were to fail even investors with capital gains to pay would make an overall loss.