As an entrepreneur seeking investment for your business, you must be aware of the SEIS (and its bigger sibling, EIS), especially if you're raising funds at the early stages.
Most of my content focuses on ensuring your business is eligible for the scheme, compliant with the rules, and guides you through the process to achieve this.
Today, however, I want you to consider the perspective of your investors and think about what’s in it for them.
As a business, we apply for SEIS because it is incredibly attractive to investors. You probably know that they get tax savings from making these investments, but it’s important to understand at least the basics of what these savings are and how they work.
If you are seeking money from people who are new to the investment world, then you will find that they ask you for help understanding how the scheme works.
The tax reliefs available are amongst the most generous across the UK tax system. They are designed to mirror the large amount of risk that comes with investing in early-stage start-ups.
The rules
There are some rules for you as an investor to get access to these benefits:
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You must invest in an eligible company (trading less than 3 years, less than 25 people, less than £350k gross assets, based in the UK and not an excluded trade)
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You must be a UK taxpayer
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You can’t be an employee or own over 30% of the company
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You can invest a maximum of *£200k per year across all your SEIS investments.
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You need to have paid for these shares upfront. no delayed payment or reciprocal agreements
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You need to hold these shares for a minimum of three years
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You can’t receive any other value from the business during that three-year period. Including loans.
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You can’t have agreements to swap investments with others or any other sort of agreement that removes the genuine risk that you could lose money as an investor.
*The limit was £100,000 prior to April 23.
It’s important that, as an investor, you understand these rules and how your personal circumstances fit within them. It is the Company you are investing in job to make sure the Company investment qualifies for SEIS, but it’s down to you to make sure that you qualify at an individual level.
What tax relief is available?
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Up to 50% Income Tax Relief when you make the investment
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No Capital Gains Tax to pay on any gains you make when you sell, no matter how large these gains are! (assuming you meet the criteria above, particularly holding for 3 years).
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No Inheritance Tax as long as they have been held for 2 years
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You can reinvest Gains from non-SEIS investments into an SEIS Company and offset 50% of the Capital Gains Tax you were due to pay
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If the worst happens and the company fails, you can claim Loss relief on up to 45% (this % is the rate at which you pay your Income tax 20/40/45) of the at-risk capital (original investment minus tax relief already received).
Loss Relief Explained
Let me show you a quick example of how this could work presuming the company fails, you get no return on your investment, and you are an additional rate taxpayer at 45%:
You invest £100,000 - at this point, you claim 50% tax relief ie £50,000
After 3 years, the company failed and returned £0. Your at-risk capital is £50,000 (Original £100k minus £50k tax relief). You can now claim loss relief on the remaining £50,000 at your rate of tax (45%); this is a tax relief of £22,500.
So, in this example, the worst-case scenario of you investing £100,000 was that you could lose £27,500 - you achieved 72.5% tax relief on that investment.
Now you can see why SEIS is so attractive…
Timing is everything
There is an important point to note surrounding this tax relief. You have to actually have the tax liability in that year to offset against. If you receive £50,000 relief but your original tax bill for the year is only £10,000, then the other £40,000 relief is wasted. You can’t carry it forward to future years.
You do have some flexibility with what year you claim the relief in, though. It doesn’t have to be the year in which you became eligible. You can carry back the relief to the previous year, presuming you hadn’t already crossed the £200k (£100k previously) limit.
You can also delay claiming the relief by up to five years from 31st January following the tax year in which you made the investment.
You can now see why you need to be strategic when claiming this relief and when you make these investments. Sitting down with your accountant and putting together a plan can very easily save you 10s of thousands of pounds.
To make a claim for tax relief, you need to have received a letter from the company, which HMRC sent to them, with your Unique Investment Reference (URI). You then enter this on your own Self Assessment Tax Return.
P.S. I am now settled on my new email routine. As a reminder, I will send an email every Tuesday covering Tax, Tech and Tactics. One post each month will be a deep dive on a topic and the others will be short snippets of value.
About the author
Luke Desmond
Fractional CFO for Tech, eCommerce & SaaS. CEO @Crisp_Acc provides virtual finance functions. Co-Founder @getvaulta SaaS Startup for accountants.