Seed Enterprise Investment Schemes (SEIS) - we love them. Every entrepreneur I know does and I meet a lot of them. And why wouldn't they? Introduced from the 6 April 2012, the SEIS offers entrepreneurs an excellent way to attract investors to risk their capital to start a new venture and we know from experience that it is hard to raise capital right now for profitable existing ventures, let alone new startups. Anything that helps an entrepreneur to raise capital (assuming it is a good investment) must be a good thing.  The banks are certainly not taking any risks for the foreseeable future so the SEIS is an important means by which entrepreneurs can attract investment.

What are the advantages of the SEIS to the investor?

Below I have listed what I consider to the be the top 10 benefits of the SEIS to the investor:

1. Investors receive income tax relief at 50% in respect of qualifying SEIS shares up to an annual maximum investment (in all SEIS companies) of £100,000.  This means that if you invest £100,000 in a SEIS you will get £50,000 back from HMRC.  The existing EIS scheme provides investors with income tax relief at 30% in respect of qualifying EIS shares.

2. Even basic rate taxpayers receive relief at the 50% tax rate - the 50% income tax relief is irrespective of the taxpayer’s marginal rate of income tax.  Therefore, if you are paying basic rate tax at 20%, you can still claim the full 50% income tax relief.

3. Each spouse can individually claim the relief on a £100,000 investment per tax year.  Therefore the investment limits apply to individuals.

4. There is a capital gains tax (CGT) exemption where SEIS shares are sold more than three years after they are issued (which is the same for EIS). Therefore, this is a saving of up to 28% in capital gains tax.

5. Investors can protect their assets from inheritance tax - after three years the investment qualifies for full inheritance tax Business Property Relief (BPR).  The inheritance tax rate is currently 40% of assets chargeable in an estate.

6. Investors benefit from a further capital gains tax (CGT) exemption of up to 28%, where an individual makes a capital gain in 2012/2013 and reinvests the proceeds in qualifying SEIS shares before 6 April 2013 (up to a maximum of £100,000).

7. When the 2012/2013 tax reliefs are combined, a £100,000 investment will effectively cost the investor only £22,000 (being a 50% income tax saving and a 28% capital gains tax saving).

8. An Investor is also protected from the risk of a loss arising on the SEIS investment.  A loss relief is available at the taxpayer’s marginal rate on the net cost of investment after the SEIS income tax relief.  For example, for a 50% taxpayer, the loss relief on a £100,000 investment would be up to £25,000.

9. In a loss situation, the Investor's combined loss relief can be worth up to 103% of the investment made, being the combination of income tax relief, capital gains tax relief and the loss relief (when all the investment is lost).

10. The Investor can be a director of the SEIS company. This gives the opportunity for Investors to pay an important stewardship role in the new company, possibly providing much needed experience to the new startup.

10 areas an Investor must watch out for:

1. Like the EIS, the Investor must not be connected to the company (this means they must not directly or indirectly control more than 30% of the share capital).

2. The maximum amount which can be raised by a company through the SEIS is £150,000 and this is an overall limit, not an annual limit.

3. The gross assets of the company must not exceed £200,000 immediately before the shares are issued.

4. The issuing company must have less than the equivalent of 25 full time employees immediately before the shares are issued.

5. The company must exist to carry on a new qualifying trade.

6. The company must have been incorporated within two years of the date on which the qualifying shares are issued.

7. The company cannot have already received Enterprise Investment Scheme of VCT investment.

8. The company must continue to qualify for SEIS for 3 years following the investment.  This is a very important rule as HMRC have to the power to review the three year qualifying period to ensure the SEIS rules were complied with.

9. Investors cannot claim the SEIS reliefs until at least 70% of the monies have been spent by the qualifying company.

10. One particular area that Investors often fail at is that the new ordinary shares issued must be fully paid up at the time of issue.  They should also have no preferential rights other than some limited preferential rights to dividends.

For further reading regarding the changes announced in the 2013 Budget - please see our article titled Budget 2013 - SEIS - Capital Gains Tax Changes Explained.

Note also that Companies which receive SEIS investment can go on to raise money under the Enterprise Investment Scheme or from a VCT after at least 75% of the SEIS money raised has been spent.  The above is a very general guide to the SEIS rules.  If you would like to learn more about what the SEIS can do for you as an Investor or as a startup company, please contact us at the email below.