Understanding Seed Enterprise Investment Scheme (SEIS)

The Seed Enterprise Investment Scheme (SEIS) is a government initiative designed to encourage investment in early-stage, high-risk start-ups. It offers attractive tax breaks to individuals who invest in these businesses. Let’s break down SEIS in plain English, including examples and potential tax benefits.

What is SEIS?

SEIS is a program launched by the UK government to support small, early-stage companies. It aims to stimulate economic growth by providing tax incentives to individual investors who back these businesses.

How Does SEIS Work?

Imagine you’re an investor interested in supporting a promising start-up. If you decide to invest in a company eligible for SEIS, you can receive various tax advantages. These benefits can make investing in start-ups more appealing.

Possible Tax Breaks Associated with SEIS

1. Income Tax Relief:

  • With SEIS, you may be able to receive income tax relief of up to 50% on investments up to £200,000 in a tax year.
  • For example, if you invest £10,000, you could receive a tax reduction of £5,000.

2. Capital Gains Tax Exemption:

  • If you hold your SEIS shares for at least three years, any profits you make from selling them may be exempt from Capital Gains Tax (CGT).

3. Capital Gains Tax Reinvestment Relief:

  • Relief can be claimed to exempt 50% of the CGT on gains made on other assets disposed of.

4. Loss Relief:

  • If the start-up doesn’t succeed and you incur losses on your investment, you may be able to claim loss relief. This can be used to offset income tax liabilities.

5. Inheritance Tax (IHT) Relief:

  • If the shares are held for two years they should be free from IHT if you die.

Eligibility for SEIS

For a company to be eligible for SEIS, it must meet specific criteria, including:

  • Be a UK-based company.
  • Have fewer than 25 employees.
  • Have gross assets less than £350,000.
  • Have traded for less than three years.

Example of SEIS in Action:

Let’s say you invest £20,000 in a qualifying SEIS company. Here’s how the potential tax benefits might play out:

  • Income Tax Relief: You can claim 50% of your investment, meaning you receive a £10,000 reduction in your income tax for that year.
  • Potential Capital Gains Tax Exemption: If the company succeeds and you sell your shares after three years, any profits may be exempt from CGT saving up to 20% tax that would otherwise be payable.
  • Potential Capital Gains Tax Reinvestment Relief: If other assets are sold close to the SEIS investment up to £2,800 could be exempted.
  • Loss Relief: In the unfortunate event that the company doesn’t succeed, you may be able to use any losses incurred to offset your income tax liabilities saving up to 60% tax.

SEIS is designed to provide investors with compelling tax incentives to support early-stage start-ups. However, it’s important to note that investing in start-ups is inherently risky, and not all ventures will succeed. We strongly recommend speaking with a financial advisor before making any investment choices.

For more information please contact Martin Adams on martin.adams@ballardsllp.com or call 01905 794 504.

Disclaimer. This is not investment advice.

This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.

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