The Seed Enterprise Investment Scheme (SEIS) has been popular with investors since launching by Chancellor George Osborne in April 2012.
Almost 2,000 SEIS scheme have been pre-approved as suitable vehicles for SEIS investments by HM Revenue and Customs since then.
One of the big attractions for investors is the tax breaks for sinking cash into new start company equity.
- SEIS give investors 50% income tax relief whatever the tax rate of the investor
- SEIS investors can claim a 50% capital gains tax exemption on chargeable gains against assets sold to directly raise the cash for a SEIS, providing the investment is made in the same tax year as the disposal
- If the firm goes belly-up in the first three years, SEIS investors can set off their losses against other income to defray risk
- Unlike the Enterprise Investment Scheme (EIS), executive directors can join in a SEIS investment, providing they keep their equity holding within the 30% threshold of total shares. Directors who start a company can also invest in SEIS
- Up to £100,000 can be put in to the equity of a SEIS company in the first year – and £150,000 overall over the next two years.
- A SEIS company can convert to an Enterprise Investment Scheme (EIS) company to benefit from another round of tax breaks – providing SEIS conditions like 70% of the SEIS investment cash has been spent.
Paid directors can benefit from the switch from SEIS to EIS as well, providing certain rules are met.
SEIS is attractive to investors prepared to accept high risk in a start-up business.
Looking at SEIS risk
Start-up investment problems are still present for seasoned investors – especially how to value the shares.
This is further complicated by the £100,000 investment restriction and the 30% limit on shareholding.
Not unreasonably, investors in start-up firms often want a larger shareholding to have a bigger saying the running of the business and to give a better return on investment. After all, they are taking a risk with their investment that deserves rewarding.
SEIS is a new investment vehicle introduced by Chancellor George Osborne in Budget 2012.
Issues of due diligence are partially dealt with by the HMRC service that pre-approves companies as SEIS vehicles by making sure they meet the qualifying criteria. However, this does not scrutinise the business plan and cashflow assumptions, which is a time-consuming and expensive job for investors who need to analyse and benchmark a deal.