What is SEIS?

50% under SEIS. You can invest up to £200,000 per year under SEIS and receive up to £100,000 in tax relief. Possibility to carry back the relief to the previous tax year.

Provided shares are held for at least three years, you will pay no capital gains tax on any profits you make from the sale of SEIS shares.

If you make a loss on an SEIS investment, you can offset that loss against your income tax at your marginal tax rate.

There is no inheritance tax to pay on shares bought through SEIS as long as they have been held for at least two years.

SEIS allows you to reduce a chargeable gain by 50% of your investment under the scheme.

UK residents who are non-UK domiciled can invest via SEIS and bring in overseas capital without a UK tax charge.

In 2008, the financial crisis hit hard, leaving businesses struggling and the economy in freefall for years to follow. The UK government responded by launching the Seed Enterprise Investment Scheme (SEIS) on April 6th, 2012, to support startups. SEIS aimed to facilitate investment in early-stage businesses crucial for future economic growth.

The scheme offered investors 50% tax relief on invested amounts, a significant incentive compared to the Enterprise Investment Scheme’s 30% relief. Additionally, SEIS provided 50% capital gains tax relief on profits from SEIS shares and excluded these shares from inheritance tax calculations, making it an attractive investment option.

However, not all companies were eligible for SEIS. To qualify, companies had to be trading or starting up, employ fewer than 25 people, and have gross assets less than £200,000 (nowadays £350,000).  They also needed to engage in innovative activities like research or new technology development.

SEIS's introduction led to substantial investments in the UK's entrepreneurial sector, with over £1.4 billion channelled into more than 10,000 companies. In the 2021-2022 financial year, SEIS helped 2,270 companies raise £205 million, a 16% increase from the previous year. SEIS-backed companies generated over £1 billion in revenue and created over 10,000 jobs in 2021-2022. The average investment per company was £91,000, with 72% of investors being individuals, demonstrating SEIS's role in democratising the investment landscape.

While SEIS faced criticism for potentially overvaluing early-stage businesses, the government maintained that its benefits outweighed the risks. Ultimately, SEIS has been a game-changer in fostering economic growth and innovation, demonstrating the impact of effective financial policy in times of crisis.

Angel Investors, often known as Direct Investors, allocate funds directly into startups. This approach requires you to identify, decide on, and manage investments personally. It is suited for individuals with the necessary time, access, and expertise to pinpoint and oversee potential successes. Being an Angel Investor is an active role, requiring your direct involvement.

Investors in funds entrust their capital to the expertise and networks of SEIS & EIS Fund managers. By pooling your resources with those of other investors, the Fund invests in a portfolio of startups on your behalf. This method offers diversified investment, mitigates risk, and provides access to high-quality startups, which may be beyond the reach of most Direct or Angel investors.

One of the most important things to do after the investment in either a company or a fund is to claim your tax relief. When investing through a fund, the fund manager will provide the SEIS3 forms necessary for tax relief claims. When investing directly, the companies will supply these.

Once the SEIS3 certificates are available, you will be able to claim your tax relief from HMRC as part of your self-assessment tax return. If you wish, you can carry your tax relief to the previous tax year as well. We recommend that you seek professional advice if you are unsure of your personal circumstances. Tax benefits are subject to individual circumstances. Subject to changes.

• For more information, check out our Investor Post-Investment Guide.

After investing through a fund, the fund manager will provide the SEIS3 form necessary for tax relief claims.

Steps include:

• Safely storing SEIS3 certificates.
• Completing the self-assessment tax return.
• Providing evidence of the investment.
• Submitting the tax return on time.

Details required for the tax return include Unique Investment Reference, investee company name, investment amount, date of share issue, and potentially the SEIS3 forms.

It can usually take between 5 days and 8 weeks to receive the tax refund in your accounts.

There is an option to backdate some SEIS investments to the preceding tax year. Either some or all of the shares can be treated as if they were issued in the previous tax year. Hence, you would be able to claim the relief for the previous year’s income tax. This is subject to the standard limit of £200,000 per tax year.

Set up a system to track your investments. Many funds offer portals for easy access to investment overviews, valuations, and company reports. Remember, early-stage startups may take time to show significant returns due to initial heavy investments in product development.

Key Risks in SEIS Investments

Investment Risk

• Small to medium-sized businesses, often operating in competitive or evolving markets, face multiple risks of failure. Despite thorough due diligence, there's always a risk of business underperformance or failure, which could lead to partial or total loss of the investment.
  
  

Liquidity Risk

• SEIS investments are not typically publicly traded, rendering them illiquid. This means they cannot be readily sold for cash. Further, SEIS regulations require a minimum three-year holding period.
  
  

Regulatory Risk

• The appeal of SEIS's tax relief is dependent on adhering to certain criteria by all parties. If there should be a failure to meet these guidelines, the tax benefits can be withdrawn, impacting overall returns.

Risks Management Strategies

Diversification

• Consider investing in SEIS funds to automatically diversify across several businesses. Alternatively, invest in a range of SEIS-eligible companies to spread the risk.
  
  

Due Diligence

• Conduct thorough research into the company's business model, market potential, and management team. Obtain professional advice when venturing into unfamiliar industries. When investing through an SEIS fund, much of this due diligence will be carried out by the fund manager.
  
  

Time Horizon and Risk Tolerance

• Early-stage investing is a long-term game, so align your investment strategy and ensure your investments do not jeopardise your immediate financial needs and only commit funds that you can afford to lose.

Regulation Compliance

• Stay up-to-date with SEIS regulations and ensure that your investee companies adhere to them. Seek guidance from tax advisors or investment professionals. Much of this will be covered by your fund manager when investing through a fund.

SEIS carry back allows investors to apply a portion of their investment against their income tax bill in the previous tax year, potentially reducing the amount of tax they owe.

SEIS is designed for investing in very early-stage companies, offering higher tax reliefs to reflect the increased risk, while EIS is for more established businesses. The right choice depends on your risk tolerance and the stage of businesses you're interested in.

A business can qualify for both SEIS and EIS by first raising funds under SEIS to the maximum allowance and then moving on to EIS for subsequent funding rounds, subject to meeting the specific conditions for each scheme.

Ineligible sectors for SEIS and EIS include finance, property development, and legal services, among others, due to their non-qualifying business activities.

Potential risks for investors include the loss of capital, liquidity risk (difficulty in selling shares), and the risk of losing tax relief if the company or investor fails to comply with the schemes' conditions.

Rules for spending SEIS and EIS funds require that the investment is used for qualifying business activities, such as development or expansion, within specific time limits.

The timeline for using SEIS and EIS investment is generally within 3 years for SEIS and within the same period for EIS, to support growth and development activities.

Exit strategy restrictions under SEIS and EIS include maintaining the investment for a minimum of three years to retain tax reliefs, with few specific restrictions on the form of exit.

Selling SEIS or EIS shares can be done after holding them for a minimum of three years, and any gain may be exempt from capital gains tax if all conditions are met.

Using SEIS and EIS with other funding is possible, but care must be taken to ensure compliance with the schemes' conditions, especially regarding the ownership and independence of the company.

If a company becomes ineligible after investment, investors may lose their tax relief, although this depends on the timing and reasons for the ineligibility.

Claiming both SEIS and EIS in the same year is possible, provided the investor has not exceeded the annual investment limits for each scheme and the investments meet all other conditions.

Common reasons for failing to qualify include exceeding the asset or employee limits, conducting disallowed activities, or not planning to spend the funds on qualifying business activities.

Applying for SEIS and EIS involves the entrepreneur submitting an application to HMRC to receive advance assurance, which helps attract investors by confirming the company's eligibility.