The Seed Enterprise Investment Scheme (SEIS) is an investment of two halves – one for investors and the other for entrepreneurs seeking cash.
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Both have rules they should stick to for a successful investment and the scheme offers benefits to both sides.
50% income tax relief
The big one is that investors can claim 50% tax relief to offset their investment.
The takeaway here is that the relief is a refund against tax paid, so if 50% of your investment exceeds the amount of income tax you have paid, you can only claim up to the value of tax you have paid.
For example, you pay £5,000 income tax but make a SEIS investment of £15,000. The 50% tax relief comes to £7,500 and wipes out the income tax you have paid, but the benefit of the extra £2,500 is lost.
The maximum SEIS stake attracting tax relief is £100,000 each financial year, so the most investors can claim as tax relief is £50,000.
Note, tax relief does not apply to dividends paid by the SEIS company.
Capital gains tax and loss relief
If you sell an asset and invest all or part of the gain in SEIS shares, you do not pay capital gains tax if you get income tax relief on the same investment.
Capital gains tax relief is 50% of the investment, up to £100,000.
You do not have to sell an asset before investing. If you do, the asset must be sold in the same tax year that you claim SEIS income tax relief.
Any gain invested from an asset sold in the 2012-13 tax year attracts 100% capital gains tax relief.
If you have received SEIS income tax relief and held the shares for at least three years, the sale of the shares is free from capital gains tax.
Should you sell at a loss, you can offset the loss less any tax relief claimed against income tax.
Investing in your own company
SEIS allows directors but not employees to invest in the scheme, providing the shareholding or shares controlled do not total more than 30% of the company’s share capital.
How the tax reliefs work
Here’s some examples of how SEIS tax reliefs work using some simple numbers – a £15,000 investment by an additional rate taxpayer paying income tax at 45% and capital gains tax at 28%.
Shares double in value
- Investment: £15,000
- Tax relief: £7,500
- Gain from share sale: £15,000
- CGT on share sale: £0
- Tax-free return: £22,500
Shares stay the same
- Investment: £15,000
- Tax relief: £7,500
- Gain from share sale: £0
- Tax-free return: £7,500
Company goes bust
- Investment: £15,000
- Tax relief: £7,500
- Share loss: £7,500
- Loss relief: £3,375 (£7,500 @ 45%)
- Actual loss: £4,125 (Investment less tax relief less loss relief)
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