The Seed Enterprise Investment Scheme (SEIS) is a great way of saving tax for anyone paying at the highest rates.
The generous tax breaks wrapped around SEIS are what makes the investment so attractive.
But like any investment, the best returns come with the greatest risks, and SEIS is no different even though the government has tried to smooth the edges.
What is SEIS?
SEIS is a tax wrapper aimed at encouraging investors to stake their cash against start-up companies who have little or no chance of raising seed capital from the banks as they are considered risky prospects as they have little or no trading history.
The scheme is backed by the government and supervised by HM Revenue & Customs.
How does SEIS work?
Entrepreneurs seeking investment can apply to HMRC for SEIS status, providing they meet a list of qualifying conditions, such as business turnover, number of employees and trading sector.
Investors are urged to buy shares in the company. The limit is to invest £100,000 each financial year in return for tax relief.
The money must stay invested for three years for an investor to claim the maximum tax relief.
In return for the investment, shareholders gain relief against income tax paid, capital gains tax benefits and should the company fail, loss relief.
How do I find a SEIS investment?
Companies can raise seed capital by going direct to investors or through specialist funds.
Many SEIS opportunities are pre-approved by HMRC, which means the tax man agrees that providing nothing changes, the company meets SEIS investment criteria and investors can apply for tax relief on the money they have staked in the scheme.
Why should investors consider SEIS?
For high earners who have maxed out their pension contributions for the year, SEIS offers another way to invest with tax relief.
The funding limits are separate from pension caps and putting money into one does not impact the allowances or reliefs offered by the other.
SEIS is not only for higher rate taxpayers, the same tax reliefs are available to everyone investing in the scheme.
SEIS in numbers
The latest statistics, published in 2018, show 8,440 companies have picked up SEIS investment worth £779 million since the scheme start in April 2012.