You invest a few thousand quid in a scrappy startup. A few years later, it’s worth twenty times what you put in. Dream scenario, right? It can happen. But it’s risky. Which is exactly why the taxman offers some pretty spectacular incentives to soften the blow if things go wrong.
The Seed Enterprise Investment Scheme (SEIS) is designed for early stage investors. We’re talking the first £250,000 into a business. After that, you’re into EIS territory. Because SEIS covers the earliest, riskiest investments, the tax breaks are genuinely generous. But as with all things HMRC, there are criteria. Lots of criteria.
Let me break it down.
What tax relief do you get on an SEIS investment?
Income Tax relief
You can claim 50% of the amount you invest as Income Tax relief. So invest £10,000 and you could knock £5,000 off your tax bill.
But here’s the catch: you need enough of a tax liability to absorb the relief. If your total Income Tax bill is only £3,000, you’ll only get £3,000 of relief. The rest is wasted. So before you invest, make sure you’ve got a rough idea of what your tax bill looks like.
You can claim relief in the tax year you invest or carry it back to the previous year. Useful if last year was a bigger tax year.
One more thing: any dividends you receive from the company are still taxable as income. The relief applies to your investment, not what you get back.
Capital Gains Tax relief
This is where SEIS investment really shines.
When you eventually sell your shares, the gain is completely free of Capital Gains Tax. Nothing. Zero. That’s assuming you held the shares for at least three years and your Income Tax relief wasn’t withdrawn.
There’s also reinvestment relief. If you’ve made a capital gain elsewhere and reinvest the proceeds into SEIS shares, up to 50% of that original gain can be treated as exempt. You can get this alongside Income Tax relief. Double win.
And if it all goes wrong and the company fails? You can claim loss relief against your Income Tax. You deduct any Income Tax relief you already received, but the remaining loss can offset other income.
How to claim your SEIS relief
You can’t claim anything until the company issues you with a compliance certificate (form SEIS3). Keep this safe. HMRC will want to see it if there’s ever a query.
Once you’ve got it, make your claim on your Self Assessment tax return. If you’ve already filed, you can amend your return or write to HMRC and complete the claim form on the back of the SEIS3. We’ve written a full guide on how to claim tax relief on your SEIS and EIS investments if you want the details.
Investing jointly with a partner? HMRC treats your subscription as equally shared, regardless of who actually put in the cash. Each of you should get your own SEIS3 from the company.
What criteria does the company need to meet?
Before you invest, do your homework. Generally, the company will have obtained advance assurance from HMRC confirming the investment should qualify. Ask to see a copy.
For the company to qualify:
- It must be UK established
- Carrying out (or preparing to carry out) a new qualifying trade
- Not listed on a stock exchange
- Gross assets under £350,000 at the time shares are issued
- Fewer than 25 full time equivalent employees
- Not controlled by another company
- Must spend the investment within three years on the qualifying trade
What criteria apply to you?
Your side of the bargain:
- You’re buying new, full risk ordinary shares
- Paid in full when issued (not settling a debt or exchanging for services, which is why sweat equity doesn’t qualify)
- You don’t end up owning more than 30% of the company
- You’re not employed by the company (nor is anyone connected to you)
- Maximum annual investment is £200,000
Don’t forget the shareholders’ agreement
Early stage investors are often asked to sign a shareholders’ agreement. Read it carefully. It governs your relationship with the company and the other investors. But it can also include warranties from the founders that they won’t do anything to jeopardise your tax relief. That’s protection worth having.
The risk is real
SEIS investment is risky; you’re backing unproven companies with unproven products. That’s why the tax relief exists, precisely because HMRC knows a lot of these businesses will fail.
Our advice? Don’t put all your eggs in one basket; spread smaller amounts across several SEIS companies in different sectors. Diversification won’t eliminate risk, but it helps manage it.
Thinking about making an SEIS investment? Or raising SEIS funding for your own startup? Get in touch! We’ll help you get it right from the start. |
