Seed Enterprise Investment Scheme (SEIS) recycling is a new idea some financial advisers are promoting to high earners who have lost pension tax incentives.
Over recent years, Chancellor George Osborne has whittled away the lifetime allowance and the amount wealthy taxpayers can stash in a pension each tax year.
The measures have led high earners and their financial advisers to look for other ways of maximising tax incentives to save and invest.
In a decade, the annual allowance has collapsed from £255,000 to £40,000 for higher rate taxpayers and the lifetime allowance that peaked at £1.8 million is now £1 million and will only grow at the rate of inflation from now on.
These restrictions leave a lot of cash affluent investors with money looking for a tax effective home.
How SEIS work
SEIS was introduced in 2013 as a method of attracting investment into start-up companies starved of cash because the banks stopped lending to risky enterprises with no trading track record.
The attractions of SEIS are the short tie-in period of three years compared to waiting until a saver is 55 years old for a pension and upfront income tax breaks of up to £50,000 for investing the maximum of £100,000 each tax year.
SEIS shares also grow free of capital gains tax and should the SEIS start-up company fail, investors can gain loss relief on any shortfalls against their original stake.
SEIS also come with no restrictions on reinvesting the money at the end of every three-year investment cycle. The term is the time an investor must hold SEIS shares to gain the full benefit of the investment.
Investments open to expats
Expats can plough cash into SEIS providing they have UK income to offset the tax incentives against.
Tax residence in the UK is not a condition of investment.
The investment opportunity is also open to anyone staking cash against companies in the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).
SEIS, EIS and VCTs are not for every investor due to the risk involved with putting cash into a start-up or fledgling business.
The first SEIS investments are about to emerge from the incubator – but EIS and VCTs have a much longer track record.