To promote small business growth, the UK government introduced the Seed Enterprise Investment Scheme (SEIS), which offers massive tax breaks for investors. Moreover, if the company fails, investors are compensated through tax relief. This encourages investing in start-ups, which are otherwise deemed high-risk.
SEIS tax relief 2024 serves as risk mitigation in investments, giving private investors confidence in investing. Find out more about investors’ SEIS advantages below, how to claim reliefs, both on tax and investment loss, and where to find SEIS investment opportunities.
What Is SEIS for Investors
Private investors would normally choose established businesses or traditional investments (such as government bonds and stocks) to invest in, instead of small startups that are just getting off the ground. SEIS was introduced in 2012 to provide crucial financial support for SMEs by encouraging investors to make equity investments.
The Seed Enterprise Investment Scheme, also called Small Enterprise Investment Schemes, levels the playing field for qualifying startups in the United Kingdom as they can more easily raise equity funds for their entrepreneurial pursuits, rather than raise capital through a loan or other means.
As seed-stage startups are the riskiest, SEIS is one of the venture capital schemes that offers the most generous investment incentives. Young businesses become government-backed, hence investment-friendly. However, it is worth noting that the scheme only mitigates the impact on investors in case of loss. They may still lose a portion of or all the investment depending on the circumstance.
Its counterpart, Enterprise Investment Scheme (EIS), offers financial support for medium-sized companies. See EIS Investment Tax Relief for more information.
Why SEIS Companies Attract Investors
Tax incentives on income tax and capital gains tax are the most appealing aspects of investing in companies that qualify for SEIS schemes. In case the invested share (or company) fails, the government also offers loss relief. How these UK tax relief programs work is discussed further below.
Investor Eligibility for SEIS
Investors can invest in a SEIS-qualifying small enterprise provided they meet the following:
- They are individuals, not corporate entities.
- They are UK taxpayers.
- They do not own more than 30% of the company’s total shares so that HMRC does not disqualify them for ‘substantial interest.’
- They must not be employees or have close relative employees of the company they invest in, but they can be company directors.
- They invest in shares qualifying for SEIS relief, specifically ordinary full-risk shares.
SEIS funds are also available, allowing investors to diversify their investments more broadly. Investors will also need to keep in mind the following regulatory requirements to qualify for claiming SEIS tax relief:
- Their investment must represent an ‘authentic’ risk.
- They can only invest a maximum of £200,000 in a tax year across all SEIS companies.
- They pay for the shares upfront and hold them for a full three years; if not, they will not benefit from full tax relief.
- They hold their shares for a minimum of three years without obtaining ‘value’ from the company, which means the company did not repay share capital, debts, nor provide them with benefits.
- The investee company remains SEIS-eligible throughout.
Being eligible for tax incentives is compliance-based. Navigating tax laws can also be perplexing as they may change at any time. Investors must consult with tax consultancy firms to be able to follow HMRC guidelines more properly and take advantage of the full relief.
What Is SEIS Tax Relief
SEIS 2024 tax benefits are designed to encourage private investment in early-stage start-ups, providing relief on the following taxes:
- Income tax
- Capital gains tax (CGT)
- Inheritance tax
Note that inheritance tax exemption only applies to SEIS shares held for at least two years. Additionally, if investors suffer any loss, they can offset it against their income tax or CGT. See below for more information about how to claim loss relief.
How SEIS Tax Relief Work
Investing in start-up-friendly SEIS companies leads to less risky investment opportunities. Start-up tax benefits generally work as follows:
- Income tax relief – Investors receive 50% back on their investment as a reduction in their income tax bill. A simple example would be a £100,000 investment resulting in a £50,000 tax reduction for that tax year.
See below how this turns out in the case of loss relief.
- Capital gains tax relief – There are two ways this relief can be applied: reinvestment relief and disposal relief. The reinvestment relief allows investors to offset 50% of their CGT bill when they reinvest their taxable profits as start-up funding for SEIS-eligible companies. Disposal relief applies when the investor sells SEIS shares held for at least three years. As long as investors meet the conditions, there will be no capital gains tax levies on the taxable gains.
- Inheritance tax relief. There is no inheritance tax liability for SEIS shares held for a minimum of two years.
How SEIS Loss Relief Work
One of the incentives of the SEIS entrepreneur support is loss relief, which can be claimed if the investment does not perform as expected within three years. If the share or company fails and the investor does not receive any more ‘value’ from the company, the latter can offset their investment losses against their income tax.
The relief will be based on the investor’s income tax rate:
- Basic rate – 20%
- Higher rate – 40%
- Additional rate – 45%
Using the SEIS tax relief example above, assuming that the investor pays 40% income tax (higher rate tax bracket) and incurs £50,000 loss, the loss relief would be £20,000.
Claiming tax and loss relief requires tax efficiency strategies. For instance, if the investor starts earning ‘value’ from the failed company, HMRC would claw back a portion of their tax relief. There are various scenarios to consider when planning investments. Tax experts can help investors become tax-efficient in their investments for the long-term.
When to Claim SEIS Tax Relief
The SEIS tax relief deadlines align with the tax filing deadlines. The deadline for submitting tax returns online is 31 January. The SEIS application period will be within 5 years starting 31 January the next tax year after making the investment.
Investors cannot carry their SEIS limit, which is £200,000 maximum across all SEIS investments per tax year, into the next. However, they have the option to carry back their contributions to the previous tax year if they still have not reached their SEIS investment limit for that tax year. The carryback option may allow them to invest £400,000 in one go.
How to Claim SEIS Tax Relief
Initially, the investee company takes charge of the process:
- They fill out the SEIS tax relief forms (SEIS 1 – compliance statement).
- They complete and distribute SEIS certificate and tax documents to investors (SEIS 2 and SEIS 3).
Filing annual self assessment tax returns is the method for receiving SEIS benefits. Investors have five years to claim and can carry back tax relief to the previous year if needed. Claiming loss relief follows the same process as applying for tax relief.
Where to Find SEIS-Eligible Companies
Investors looking for SEIS qualifying companies can search in the UK government’s SEIS site. The site connects both companies and investors seamlessly. They may also want to connect with financial hubs in the UK, including start-up expos, tax incentive seminars, tax advisory events, and other entrepreneurial events.
Other SEIS Tax Relief FAQs
The SEIS 4-month rule requires startups to either have traded for at least four months or have spent 70% of the SEIS investment before applying for full SEIS clearance.
Both SEIS and EIS offer income and capital gains tax levy relief, but SEIS particularly offers 50% income tax relief and EIS 30%. SEIS supports start-up growth, whilst EIS assists medium-sized companies.
Investors can only claim full tax relief if they hold their SEIS shares for at least three years. To reap the full financial benefits, investors must work with financial planning experts.
2024 tax policies on SEIS state that the scheme does not consider company directors as employees, which means they are eligible for tax relief.
Yes, but not on the same day. SEIS must be raised first, then EIS.
Why Our EIS and SEIS Services
SEIS tax relief 2024 puts both companies and investors at a win-win. Investors become less liable for any losses and damages to the investee company, especially maximizing tax efficiency through tax breaks. Startups, on the other hand, can raise equity funds up to £250,000.
But SEIS does not mean zero risk; it only mitigates. This is why you need an independent financial advisor before investing. Legend Financial is here for this matter. Our office in Stratford, London and branches throughout the UK allow us to offer both in-person and online assistance. For over ten years, we have facilitated a lot of successful investments. Talk to our SEIS and EIS consultants today!
