The Seed Enterprise Investment Scheme SEIS bridges the funding gap between business start-ups and investors. The scheme achieves this by offering the investor exceptional tax breaks which makes the investment very attractive to UK investors. In this article, we take a look at the key benefits and explain why SEIS is the best investment scheme for UK investors.
What is SEIS?
SEIS is a venture capital scheme that was introduced by the government in April 2012. The scheme follows on from the Enterprise Investment Scheme which still gives very good tax incentives to investors. However, the government has realised that it could still do more to help qualifying start-ups accelerate funding to grow and prosper.
Why are extra benefits given?
Under the Enterprise Investment Scheme, companies are eligible for funding if they have been trading for less than seven years, providing they meet other criteria. However, SEIS is designed specifically for early-stage companies that have been trading for less than two years. Many of these companies are innovative, being STEM-based (Science, Technology, Engineering, Maths). SEIS qualifying companies have the ability to grow very quickly. This can drive economic growth, by creating lots of skilled jobs and future income resulting in more taxes back to the government.
|The top ten benefits of investing in SEIS qualifying companies|
|1. Potentially superb returns on investment|
|2. 50% income tax relief|
|3. Returns are capital gains tax free|
|4. Shares are passed on free of inheritance tax|
|5. Risk can be further mitigated with loss relief|
|6. Capital gains tax reinvestment relief|
|7. Any UK taxpayer can access the scheme|
|8. Investing in innovation|
|9. Investments can create a positive social impact|
|10. Investment kudos|
1. Potentially superb returns on investment
Investing in early-stage growth companies can pay-off big. Small companies have the ability to deliver very high returns on investment to early-stage investors. This is especially the case for companies that uses technology to drive growth.
SoftBank founder and CEO Masayoshi Son invested $20 million in Alibaba in 2000, a bet that was worth $50 billion when Alibaba went public in 2014.
Jeff Bezos invested $250,000 in Google in 1998 in a private equity deal. His holding would be worth more than $8 billion today had he not sold some of his holdings along the way.
In the UK, several companies have used SEIS and EIS funding to achieve rapid growth and deliver phenomenal returns to their investors in the process. Cazoo, for example, is the brainchild of Zoopla entrepreneur Alex Chesterman. He had used EIS previously to raise money for Zoopla, which was eventually sold in a private equity deal for $3 billion. Cazoo also raised money through these schemes in 2019. By 2021 the company floated on the US stock exchange with a $7 billion valuation.
2. 50% income tax relief
SEIS offers excellent tax breaks. Investors in this scheme are eligible for 50% income tax relief. This means for every pound you invest you get back 50 pence at the end of the tax year, irrespective of the performance of the underline investment. This differs from EIS where income tax relief is capped at 30%.
3. Returns are capital gains tax free
When you invest in either SEIS or EIS there is no tax to pay on profits. This makes it very attractive to investors, especially higher earners where capital gains are levied at a higher rate.
Under current tax rates, the higher/additional rate of CGT is 28% on residential property and 20% on all other assets, once the capital gain tax allowance has been reached. Whilst, for standard rate taxpayers CGT is levied at 18% on residential property and 10% on other assets. You can find out more about the current CGT rates by downloading our brochure on CGT for the current tax year.
4. Shares are passed on free of inheritance tax
Under current tax rules, once a person has exceeded the IHT threshold, the beneficiaries of the estate pay 40% tax on the rest. Because of this, many elder investors either gift money to their children or place it in a trust to avoid paying IHT. However, both of these options rely on the benefactor living seven years to fully mitigate IHT. By investing in SEIS or EIS-qualifying investments this time period is reduced down to two years.
Investors wishing to know more about IHT should can read our article titled inheritance tax explained. Alternatively, you can download the full IHT guide for the current tax year from our guides section.
5. Risk can be further mitigated with loss relief
On top of receiving 50% income tax relief, investors can further reduce their exposure to losses if the investment doesn’t turn a profit. For any loss that is incurred, loss relief will further reduce investors’ losses.
How does this work?
Let’s assume Adam invested £10,000 in a SEIS-qualifying company. Adam would automatically receive £5,000 back due to income tax relief at 50%. This means that Adam now only has £5,000 of risk exposure on his £10,000 investment. Should the investment fail or turn a loss then Adam can further offset his loses. In this example, Adam is a 40% tax payer and the investment completely fails. Under SEIS he can further offset his loses at 40%. This means Adam is entitled to an additional £2,000 paid back from his £5,000 loss. The net result is Adam has only lost 30% of his invested funds (£3,000) despite the company completely failing. For 45% taxpayers their risk exposure is lower still.
6. Capital gains tax reinvestment relief
Capital gains reinvestment relief in another great benefit which is specific to SEIS. It allows an individual who has disposed of a chargeable asset that would normally be liable to capital gains tax to treat up to 50% of the gain as exempt should they reinvest in into SEIS-qualifying shares.
How does this work?
If a higher rate taxpayer sold an investment property for £100,000 profit, he or she would have a CGT bill to pay of £28,000. This is assuming that they have already used their CGT allowance for the current tax year. By placing The full amount of money into a SEIS-qualifying company this tax would be reduced down to £14,000. Therefore for a 45% taxpayer who uses CGT reinvestment relief, their real exposure in a £100,000 SEIS investment is only £13,500 or 13.5 pence in the pound. Whilst on the flip side if the investment delivered a tenfold return on investment then there is no CGT to pay.
7. Any UK taxpayer can access the scheme
The great thing about both SEIS and EIS-qualifying companies is that they are open to all UK taxpayers. Investing in these schemes doesn’t directly impact other tax breaks offered to investors such as ISAs and tax relief on pensions.
8. Investing in innovation
A large percentage of companies that use SEIS and EIS are innovative companies. These companies can grow very quickly due to a unique development in the way of doing things. Often innovative businesses, such as STEM-focused businesses have higher profit margins due to a lower cost of sales.
9. Investments can create a positive social impact
Many companies which raise funds through SEIS and EIS create a positive social impact. This benefit can be felt locally or internationally depending on the business you decide to invest in.
10. Investment Kudos
Ok you got us, investment kudos is not a real investment term. But we like the way it sounds.
As an investor (putting money to one side), it can feel good to tell people that you invested in a successful company right at the beginning and you directly contributed to its success.
Risk and return
Investing is about risk and return. Although investing in early-stage companies comes with risk, by actively seeking out promising start-ups, the SEIS offers investors a great opportunity to generate high growth, whilst significantly reducing their tax bills. This is why SEIS is considered by venture capitalists as the world’s most generous investment scheme. You can find out more about SEIS, including important questions to ask by clicking on the link provided.