Extra SEIS Tax Breaks For Crowdfunders

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Crowdfunders are waking up to the benefits of the Seed Enterprise Investment Scheme (SEIS) and starting to label pitches on their platforms that attract the extra tax breaks.

UK crowdfunding platforms like Crowdcube now allow potential investors to search their database of deals looking for funding tagged as SEIS or Enterprise Investment Scheme (EIS) approved by HM Revenue & Customs (HMRC).

So, although investing in startups or early-stage growth companies is risky, both SEIS and EIS can remove the tax sting.

SEIS is designed to boost investment in startups needing £100,000 or less. SEIS gives income tax relief on shares in a startup, including stakes purchased through a crowdfunding platform.

How SEIS and EIS work

Here’s how SEIS works:

Booking.com
  • Investors can claim income tax relief at 50% on the cost of their equity stake to a maximum £100,000
  • If shares are sold, 50% of the gain is free of capital gains tax providing the cash is reinvested in more SEIS shares
  • If the SEIS fails, investors can claim loss relief

EIS offers similar tax benefits to a SEIS – the major differences are:

  • Investors can sink up to a £1 million in an EIS company
  • Income tax and capital gains tax reliefs in an EIS are at the lower rate of 30%
  • EIS qualify for loss relief

Shares must be held in a SEIS or EIS for three years to qualify for the tax breaks, or HM Revenue & Customs (HMRC) can claw them back

Dividend tax trap

Any dividends declared on SEIS and EIS shares are still subject to income tax at the investor’s marginal rate of tax, so the investments are for growing wealth rather than income.

For investors who do not want the hassle of seeking out SEIS and EIS investments and managing their share portfolios directly, some fund managers are offering managed SEIS, EIS or hybrid funds.

These passive investments offer the same tax breaks, but for hands-off investors prepared to pay a management fee, they are worth looking at.

Two companies offering this are Mercia Fund Management and Jenson Fund Partners.

Investing in a fund also gives a lower entry cost than taking a direct equity stake in a SEIS or EIS company.

Open SEIS opportunities on Crowdcube include LuxTripper, a luxury online travel agent; Ergsy.com, an online lifestyle platform for the over 60s and Terence Woodgate Lighting.