The Seed Enterprise Investment Scheme (SEIS) is a UK government-backed initiative designed to help startups and early-stage companies raise money for their businesses. In this comprehensive guide, we will explore the 2023 SEIS rules, qualifications, and tax benefits that investors and companies can benefit from.
Table of Contents
Overview of SEIS
What is the Seed Enterprise Investment Scheme (SEIS)?
The Seed Enterprise Investment Scheme (SEIS) is a tax investment scheme designed to help founders raise funds and investors support startups. Introduced in 2012 as a complement to the EIS, it incentivizes investors to fund early-stage companies by offering tax breaks on these investments and their returns. Used properly, it can be a win-win for both parties. In this comprehensive guide, you will find everything you need to know about SEIS, whether you are an investor or a founder. The SEIS is a UK government initiative that offers attractive tax reliefs to individual investors who invest in new shares issued by qualifying early-stage companies. The scheme is designed to help startups and small businesses raise money for their growth and development.
How is SEIS Different from the Enterprise Investment Scheme (EIS)?
While both SEIS and EIS are government-backed investment schemes, SEIS focuses on early-stage companies, while EIS targets more established businesses. The tax relief rates and investment limits also differ, with SEIS offering more generous tax incentives for investors.
Updated SEIS Regulations from April 2023
• The maximum amount companies can raise through SEIS has increased from £150,000 to £250,000.
• Companies are now eligible to raise SEIS funding within their first 3 years of trading, as opposed to the previous 2-year limit.
• To qualify for SEIS, companies must have gross assets of no more than £350,000, an increase from the previous £200,000 threshold.
How SEIS Works for Investors
Investors can claim a 50% income tax relief on their SEIS investments, up to a maximum investment of £200,000 per tax year. This means that investors can potentially reduce their tax bill by up to £100,000 per year.
Capital Gains Tax (CGT) Relief
If an investor sells their SEIS shares after holding them for at least three years, any capital gains they make will be free from CGT. Additionally, investors can also defer a capital gains tax bill from another asset by investing the gain into an SEIS-eligible company.
If an investor loses all the money they invested in an SEIS company, they can claim loss relief against their income tax or capital gains tax liability, depending on their individual circumstances.
Qualifying for SEIS
To qualify for the SEIS scheme, a company must:
- Be based in the UK and not be a quoted company.
- Have fewer than 25 employees.
- Have gross assets of no more than £350,000 before the share issue.
- Be less than three years old.
- Not have received investment under the EIS or Venture Capital Trust (VCT) schemes.
- Not be part of a scheme or arrangement with the main purpose of tax avoidance.
- Use the investment for a qualifying business activity within three years of the share issue.
To invest in SEIS and claim the tax reliefs, an investor must:
- Be an individual, not a company.
- Not be an employee of the company, unless they are also a director.
- Not hold more than a 30% interest in the company.
- Hold the SEIS shares for at least three years.
Understanding SEIS for an Investor
SEIS provides extensive tax reliefs for tax-paying investors who support small, early-stage companies in the UK. Investors can claim tax relief on 50% of investments up to £200,000 and are exempt from any capital gains tax (CGT) on any gains. Funding small, early-stage companies is risky, so the tax breaks are particularly generous to attract more investors to support them. In doing so, it helps founders raise the capital they need and stimulates growth and innovation in the UK startup scene.
How the SEIS Scheme Works
SEIS offers tax reliefs to individual investors who fund small, early-stage businesses that are just starting to trade. Investors are allowed to make a maximum SEIS investment of £200,000 per tax year. Businesses are allowed to receive a maximum of £250,000 through SEIS – note that this figure includes any de minimis state aid received in the three years up to and including the date of the investment. Any later investments made through other venture capital schemes will also have to take this limit into account.
Several rules must be followed to ensure the scheme is used correctly – we will cover these below. They have to be followed for at least three years to ensure investors can take advantage of the tax breaks offered. Otherwise HMRC can withdraw the advanceed assurance.
Benefits of SEIS
In a nutshell, the Seed Enterprise Investment Scheme encourages private investors to invest in early-stage businesses. For founders, this makes the often-difficult task of attracting investment to a small business easier. If the investment works out, investors will enjoy generous tax relief on their gains – and some support if it doesn’t.
Here’s a summary of the benefits of the Seed Enterprise Investment Scheme for investors:
- Income tax relief
- Capital gains tax relief
- Loss relief
- Inheritance tax relief
- Increased return on investment
- Diversification of investment
The Seed Enterprise Investment Scheme also has major benefits for founders:
- Easier access to funding
- Lower cost of capital
- Tax breaks for existing investors
- Increased interest from new investors
It’s important to note that there are several types of companies excluded from the SEIS scheme, including:
- Companies in financial or banking sectors
- Companies involved in legal or accounting services, property development, or farming
- Companies that are subsidiaries or part of a larger group of companies
- Companies carrying out a qualifying business activity such as investment, property management, or professional services
Available SEIS Tax Reliefs
The tax reliefs offered through SEIS are extremely generous to offset the risk of investing in an earlier-stage company:
To be eligible for SEIS tax reliefs, investors must hold their shares in the SEIS-qualifying company for a minimum of three years. This holding period is necessary to benefit from the capital gains tax (CGT) exemption, loss relief, and other tax incentives offered under the SEIS scheme.
Can you sell SEIS shares?
Selling SEIS shares is possible, but there are certain conditions and restrictions to consider. Firstly, if an investor sells their SEIS shares before the end of the three-year holding period, they will lose the tax reliefs associated with the investment. Additionally, liquidity might be limited, as there is no recognized market for SEIS shares, which can make it more difficult for investors to sell their holdings.
New SEIS rules and regulations
The rules and regulations surrounding the Seed Enterprise Investment Scheme (SEIS) are subject to change. It is crucial for both investors and founders to stay up-to-date with the latest developments to ensure compliance and maximize the benefits of the scheme. In recent years, there have been updates to SEIS rules, such as the introduction of the risk-to-capital condition and changes to the eligible activities list. Investors and founders are advised to consult with a professional, such as an accountant or tax advisor, to ensure they are aware of and compliant with the latest SEIS rules and regulations.
The impact of Brexit on SEIS investments
Brexit has led to some changes in the regulatory landscape for investments, including SEIS investments. However, the SEIS scheme remains operational and continues to provide tax incentives for investors supporting early-stage UK companies. Investors and founders should monitor any potential changes to the scheme as the UK navigates its post-Brexit landscape, and consult with professionals to ensure they remain compliant with any new regulations.
SEIS Advance Assurance
What is SEIS Advance Assurance?
Advance Assurance is a process through which companies can obtain confirmation from HMRC that they are likely to qualify for SEIS before they start raising funds. This can give investors more confidence in the investment opportunities and help companies attract investment.
How to Register for SEIS Advance Assurance
To apply for Advance Assurance, a company must submit an online application to HMRC, providing details about their business, including:
The company’s business plan and financial forecasts.
A description of the company’s products or services.
3Information about any trading subsidiaries.
4. Details of any previous investments received.
5. A list of the proposed investors, if known.
HMRC will review the application and provide a response, usually within four to six weeks. If approved, the company will receive a confirmation letter that can be shared with potential investors to demonstrate their SEIS eligibility.
1. Can a company raise money using both SEIS and EIS?
Yes, a company can raise money using both SEIS and EIS schemes. However, it must first raise funds through SEIS before it can move on to the EIS. The total amount raised under both schemes should not exceed the relevant investment limits.
2. How long does it take to receive SEIS tax relief?
Investors can claim SEIS tax relief in the same tax year the shares are issued. To claim the relief, investors need to complete the SEIS3 form provided by the company and submit it to HMRC.
3. How can a company ensure it remains eligible for SEIS relief after receiving the investment?
To maintain eligibility for SEIS relief, a company must:
- Spend the investment for the qualifying business activities within three years.
- Not become a quoted company or part of a larger corporate group.
- Continue to meet the other SEIS eligibility criteria during the three-year holding period.
4. Can non-UK residents invest in SEIS-eligible companies?
Yes, non-UK residents can invest in SEIS-eligible companies, but they may not be able to claim the full range of SEIS tax reliefs. It’s essential for non-UK residents to seek professional advice to understand their eligibility for SEIS tax benefits.
5. What happens if an investor disposes of their SEIS shares before the end of the three-year holding period?
If an investor disposes of their SEIS shares before the end of the three-year holding period, they may lose some or all of the SEIS tax reliefs they have claimed. The exact impact will depend on the circumstances and the reasons for the disposal.
The Seed Enterprise Investment Scheme (SEIS) is an invaluable resource for early-stage companies looking to raise money for their businesses, offering significant tax incentives to individual investors. By understanding the 2023 SEIS rules, qualifications, and tax benefits, both investors and companies can make informed decisions about their involvement in this high-risk, high-reward investment opportunity.
Ready to Unlock the Potential of SEIS for Your Business or Investment Portfolio?
Don’t miss out on the incredible opportunities offered by the Seed Enterprise Investment Scheme. Whether you’re a startup seeking to raise funds or an investor looking for high-growth potential and significant tax benefits, SEIS could be the perfect solution for you.
To ensure you make the most of this powerful investment scheme, it’s crucial to have an expert by your side. Jack Ross has the knowledge, experience, and dedication to help you navigate the complexities of the 2023 SEIS rules and maximize the benefits for your business or investments.
Don’t wait any longer to take advantage of the generous tax reliefs and growth opportunities provided by SEIS. Give Jack Ross a call today at 0161 832 4451 to discuss your specific needs and find out how he can help you succeed in your SEIS journey.
Alternatively, if you prefer to connect online, simply fill out the webform below with your contact information and a brief message about your SEIS interests. Our team will be in touch with you shortly to discuss your goals and guide you through the process of leveraging the Seed Enterprise Investment Scheme to its full potential. Don’t let this opportunity pass you by—submit the webform now and take the first step towards a brighter financial future!