Looking for funding? Learn more about the Seed Enterprise Scheme
No matter what stage you are in the business cycle, start up or mature business, cash flow is imperative to keep your business functioning as well as planning for future growth.
Business funding comes in many forms and has evolved in recent years from the traditional bank loans or government grants.
The Seed Enterprise Investment Scheme (SEIS)
SEIS incentivises individual investors to invest in your business with up to 50% tax relief on their income tax bill for investments made up to £100,000.
Furthermore, when the investor come to sell their SEIS shares in your business, they receive a capital gains tax (CGT) exemption.
So this means that the tax reliefs incentivise potential investors to both invest in your business and likewise help it grow, so the investor too can enjoy the gains made in the business, tax free.
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The SEIS tax reliefs are incredibly generous in the UK.
If you are a UK higher rate taxpayer, you will likely be looking for ways to reduce your overall income tax burden, and investing in qualifying shares is one option open to you.
We all hope our investments do well but if you pay tax at 45% as a higher rate tax payer and say you make an investment of £10,000 in SEIS qualifying shares that makes you no money, you only lose £2,750 due to the tax relief available under the SEIS.
That’s what makes the SEIS so appealing to potential investors and why fast growing, enterprising business owners should consider seeking advance assurance from HMRC to confirm you are eligible for an SEIS investment.
Who can make an SEIS claim?
The individual investor must be a UK resident and taxpayer
The investor could be one of the director’s in the company, but not an employee i.e not on payroll
An investor’s stake in your company can be no more than 30%
SEIS tax relief applies only to recently formed incorporated companies
The company must have 25 or less employees and gross assets of up to £200,00
Examples of how an investor can gain from an SEIS investment in your company
Case 1: Your company doubles in value
Investor’s initial outlay = £10,000
Income Tax Relief = £5,000 (investor get 50% off their income tax bill)
Profit from sale of SEIS shares = £10,000
Capital Gains Tax = Zero (shares must be held for three years at least)
Tax free return = £15,000
Case 2: After 3 years, your company’s value stays the same
Investor’s initial outlay = £10,000
Income Tax Relief = £5,000 (investor get 50% off their income tax bill) Profit from sale = zero
Gain for investor= £5,000 reduction in their income tax bill
Case 3: Your company folds and the SEIS shares hold no value
Investor’s initial outlay = £10,000
Income Tax Relief = £5,000 (investor get 50% off their income tax bill)
At risk capital = £5,000
Loss relief = £2,250
Investor’s actual loss = £2,750 (£10,000 - [£5,000+£2,250])
So you can see that an investment in your company via the SEIS poses limited risks if for some reason your company fails but has the potential for big rewards for all if your business grows.
A further tax incentive - ‘carry back’
Did you know that if an investor makes an SEIS investment in your business, they can ‘carry back’ the income tax relief to a previous tax year if they wish?
So for example, if an investor makes an investment ofv£20,000 in the tax year 2020-21 (6 April 2020 to 5 April 2021) in SEIS qualifying shares, the SEIS relief available is £10,000 (£20,000 at 50 percent).
If the investor has a tax liability for the year before of £15,000, this be can reduced or ‘carried back’ to reduce it to £5,000 (£15,000 less £10,000) as a result of this year’s SEIS investment.
Other selling points for an investor
If you already have HMRC’s SEIS ‘advanced assurance’, an investor is more likely to consider your company for investment due to the tax incentives outlined above.
An investor can claim their tax relief once your company been trading for a minimum of four months post investment or you have spent 70% of the investment received.
Finally, and this is another big incentive, SEIS relief can be claimed up to five years after the 31st January in the year the investor made the investment.
Please visit the HMRC website for further information on SEIS tax relief.
