Every day at Sapphire Capital we talk with numerous entrepreneurs who are setting up companies and one of the most common questions they have is what are the Seed Enterprise Investment Scheme ("SEIS") tax reliefs and can their new enterprise obtain them for potential investors? This is a great question and an important one for any entrepreneur who is seeking to raise finance for their company.
Although at Sapphire we specialise in SEIS, EIS and SITR, that does not mean that we always recommend that obtaining SEIS (or EIS) advance assurance is the right thing to do.
This blog article will seek to (1) explain the six main tax reliefs, (2) give directions as to how a company can obtain these reliefs for itheir investors as well as (3) assisting business owners in deciding whether obtaining SEIS advance assurance is right thing to pursue.
The six main tax reliefs are as follows:
One: Income Tax Relief On The Amount Invested
The Income Tax relief is 50% on the amount subscribed up to a maximum of £100,000 for the tax year ending 5 April 2016.
Example: if an investor invests £100,000 into an SEIS qualifying company, they would save £50,000 on their tax (£100,000 at 50%). The relief is given against the individual's income tax liability for the tax year in which the shares are issued unless the individual makes a carry back relief claim. Relief is limited to an amount that reduces the investors income tax liability for the year to nil.
Two: Income Tax Carry Back Relief
Relief claims may be made for amounts subscribed for shares in SEIS qualifying companies, such that an investment is treated for tax purposes as having been made in the tax year before the tax year in which the investment was actually made.
Example: provided that no prior year SEIS investments have been already made, an investor can invest up to £200,000 (with a maximum per single company of £100,000) with a saving of £100,000 (£200,000 at 50%) on their tax - assuming of course that they have the tax to relieve.
Three: Capital Gains Tax Re-Investment Relief
Investors in a company can claim exemption for 50% of capital gain realized in the tax year when proceeds are re-invested in the same tax year in qualifying SEIS companies. This would save an investor 14% tax (ie. 50% of the current capital gains tax rate of 28%). It is noted that CGT re-investment relief is only available if the income tax relief described above can be claimed.
Example: an investor has a capital gain of £50,000 which was taxable at 28% and makes a £50,000 investment into a qualifying SEIS company. The investor would save £7,000 in capital gains tax (28%x50%x£50,000=£7,000).
Four: Capital Gains Tax Exemption
This tax exemption is considered to be the most important of all the tax savings and thus is hopefully the primary reason for obtaining SEIS advance assurance and associated reliefs. Any capital gains that occur on the sale of the investment after three years are tax free. This alone is the key reason to ensure your company obtains SEIS tax relief for its investors.
Example: if an investor invested £100,000 in a company and sold the shares four years later for £1,000,000, the £900,000 gain is tax free. This allows for a significant capital gains tax saving of £252,000.
Five: Loss Relief Against Income On Gains
If the investment goes the wrong way and the investor losses money, a loss on the shares disposed of can be set against an investor's income or capital gains to reduce the tax, which is important for limiting losses on the investment.
Example: an investor invests £50,000 into a company but the investment unfortunately fails completely and is wound up with no money back, the investor would obtain an £11,250 income tax relief on their loss assuming they were a 45% tax payer, so their total loss would be £13,750 - being £50,000 investment less £25,000 SEIS relief less £11,250 loss relief, which equates to £13,750.
Six: Inheritance Tax Relief
Although it is not an SEIS relief as such, an investment in an SEIS qualifying company will normally qualify for 100% relief from inheritance tax, provided the investment is held for two years and still held at time of death.
There are other tax reliefs, such as business investment relief for certain UK resident, non-UK domiciled investors, but the above six tax reliefs are main ones.
How to Obtain Tax Reliefs
It is very straightfoward - you can obtain advance assurance for your company from HMRC by writing to them and asking for your company to qualify for the reliefs. The application requires that a business plan is submitted as well as other relevant supporting documentation. We would be happy to help you prepare this application if required. Just enter your contact details in the link below.
Is obtaining SEIS tax relief (and therefore advance assurance) for your company right for you and your investors?
Okay, perhaps we are biased, being supporters of SEIS, but would an investor not want to take advantage of the tax reliefs we have outlined above? I am sure if given the choice, they would. There is an administrative requirement from the company's point of view (i.e. obtaining the SEIS advance assurance and obtaining the compliance certificates for investors etc.) but if you as an entrepreneur can ensure that your investor makes, for example, a £100,000 investment into your company and gets potentially £50,000 back in tax relief (hence net investment is £50,000) then the consideration to invest becomes more attractive given such incentivisation in comparison to investment opportunities that may not offer this.
Written by Boyd Carson
As a partner at Sapphire Capital Partners LLP, Boyd spends his days structuring SEIS, EIS and SITR schemes for companies and applying to HMRC for advance assurance on behalf of clients. Boyd also acts as an investment manager to several SEIS and EIS investment funds and acts as a director of several EIS companies. Contact him by email at firstname.lastname@example.org or view Boyd's profile here.