I think the SEIS scheme is one of the most interesting and generous schemes HMRC offer…and yes I know, generous and HMRC rarely appear in the same sentence but when I see it I call it! So let’s have a closer look at why I think SEIS is such an attractive scheme for both entrepreneurs and investors.
What is SEIS?
The Seed Enterprise Investment Scheme gives a selection of tax breaks and reliefs to the investor. Simply put these tax reliefs are:
- Income tax relief of 50% of the investment amount
- 0% capital gains on any earnings from the shares
- Loss relief even if the company fails.
From a founder perspective, it means you can attract working capital with limited downside to the investor. And from an investors perspective, it means you can invest in SEIS qualifying companies and skew the risk to reward scale in your favour.
It really is a win-win designed to match capital with startups with much of the risk underwritten by the government.
What companies qualify?
Some company types are exempt regardless of anything else: some examples include, money lending, banking and property development. (But the list does contain many more so do check)
The company also has to pass the eligibility criteria. These are:
- Less than £200,000 in gross assets
- Less than 25 employees
- Trading for less than 2 years
- Have a permanent establishment in the UK
- Not listed on a stock exchange
- Fully independent
What criteria does the investor need to satisfy?
To qualify for the benefits of SEIS the investor needs to meet the following criteria.
- Shares must be held for a minimum of 3 years
- The company should be SEIS compliant throughout
- The maximum investment per year through SEIS is £100,000
- The largest stake you can acquire in a single company is 29%
- You can not be employed in the investment company
- Shares must be paid for in cash
Sounds pretty decent right?! Ok, let’s look at three real-world examples of investing say £10,000 into an SEIS qualifying business.
(For these examples, we’ll assume you are on the 45% income tax bracket and you pay capital gains tax at 28%)
You invest £10,000 and immediately receive £5,000 in income tax relief. Thank you very much…
Scenario 1 – The company goes bust.
Let’s face it, most startups fail. So what happens to your investment if the company folds?
The value of your shares goes to £0. However, you receive loss relief of 50% of your investment multiplied by your tax rate.
In this case = £10,000 x 50% = £5,000
£5,000 x 45% = £2,250
Your total loss on your £10,000 investment despite the company going bust is just £2,750
Scenario 2 – The company does nothing, and you sell for your investment price.
The value of your shares stays at £10,000 and 3 years later you sell back to the founder for the price you paid.
You get your £10,000 back plus the £5,000 income tax relief already claimed.
Total = £15,000
Scenario 3 – The company grows and so do your shares.
The company does well and you exit after 3 years for a 100% gain on the value of your shares. £20,000.
You pay 0% capital gains tax from the profits AND you already have the £5,000 income tax relief.
Total back £25,000 (Zero tax to pay)
As you can see it’s a decent outcome either way. From a founder’s perspective if you are SEIS compliant you can attract investment with very limited downside for the investor and even more upside. That does make investing in your company a more attractive proposition than without.
If this sounds interesting to you, then give us a call. We can apply to HMRC on your behalf for assurance that your company qualifies for the scheme. If successful you’ll get a statement saying the investment is likely to qualify which you can show to investors. It’s like having Willy Wonka’s Golden Ticket….