October 30th, 2012 / Insight posted in

The Seed Enterprise Investment Scheme (SEIS): Regenerating the economy?

Introduced for shares issued on or after 6 April 2012, SEIS presents a unique opportunity to invest in small businesses and get up to a 78% tax incentive on your investment. After 6 April 2013 it is likely that investors receive only a 45% incentive. The government appears set on closing tax saving schemes for high earners and the wealthy, so the current tax years opportunity is a rare one and will need quick action to identify a suitable investment and benefit from this generous scheme.

For this tax year SEIS investment can be up to £100,000 and attract an income tax saving at 50%. Clearly, the income tax relief can only reduce the income tax liability of the year to nil, so the actual benefit for some investors may be less than 50%. Also, where an investor disposes of an asset which would give rise to a chargeable gain in 2012/13, and reinvests all or part of the gain in shares which qualify for SEIS income tax relief, the amount reinvested will be exempt from capital gains tax. This will save some investors another 28% on the amount they invest.

Thus £100,000 invested in SEIS equity in the year starting 6 April 2012 could cost as little as £22,000, and any capital gains are tax free too where the shares are held for three years and income tax relief has not been withdrawn. Merely getting one’s investment back with no increase in value could deliver a 354% tax free return. The downside has some protection too as any losses can be offset against income at an investors’ highest marginal income tax rate. Thus even total loss could cost a 50% tax payer only 11% of their gross investment.

The alternative to SEIS is EIS – you can also invest up to £1m in Enterprise Investment Scheme (EIS) and receive 30% back as tax refunds.

Comparing the two schemes:

The investor in a start-up business (from 2012/13) through SEIS:

  • exemption from capital gains tax on gains on other assets invested in the business in 2012/13 only;
  • a 50% income tax relief (even for basic rate taxpayers) on the money invested;
  • complete exemption from capital gains tax on disposal.

The investor in a larger Enterprise Investment Scheme (EIS) business:

  • deferral of capital gains tax on gains on assets invested in the business;
  • a 30% income tax relief on the money invested;
  • complete exemption from capital gains tax on disposal.

Just like R&D incentives, SEIS and EIS are only available to the limited company structure, and not to partnerships or LLPs.

Both SEIS and EIS schemes run the risk of becoming non qualifying after an investment is made, which can be entirely out of the investors control. In practice it is important when using the schemes that the emphasis is on using them to sweeten an investment you would have made anyway, rather than investing solely for the tax benefits. Both SEIS and EIS have numerous technical conditions that have to be satisfied, including issues around size restrictions; restrictions against certain trades, any other connections with the company, and restrictions of the size of shareholdings. Clearly, great care is needed with structuring an investment to ensure that the required relief is due. The rules have not been made easy!

We see SEIS being used at the very early stages of a business, typically where friends are participating in a friends and family funding round. Beyond that, EIS is more likely to get used in most cases as investors tend to look for a business that is beyond the start-up stage and is starting to generate sales. Regardless of how much SEIS gets used, it is already attracting more investors to look at early stage businesses. Whether this affects the quality of opportunities adversely, or helps regenerate the economy remains to be seen.