So how does SEIS work?

Basically, there are very generous tax reliefs if an investor puts money into an eligible company. If you invested say £50,000 cash for shares, you would get 50% of that as a relief against your income tax bill; in this example you would therefore save £25,000 in tax. So effectively, rather than the Government getting it, the entrepreneur gets to use it to grow their enterprise. If the investor then holds the shares for at least three years, they will not have to pay any capital gains tax on any profit they make when they finally sell those shares.

Which businesses and investor are eligible for the scheme?

The company’s business must have been started less than two years before shares are issued - in other words it is from the start of trading and not from when the company itself was incorporated. The company must have fewer than 25 staff and assets of less than £200,000 pre-investment. An individual investor can get SEIS relief on up to £100,000 per annum, and can be a director of the company but not an employee. If someone has more than 30% of the shares then they are ineligible for SEIS.

If the activity listed below is a substantial part of the company's activities (>20% or so) , it is unlikely to be eligible for SEIS as these trades are specifically disqualified:

  • Dealing in land
  • Dealing in commodities, futures or (subject to exceptions for wholesaling and retailing) goods
  • Dealing in shares, securities or other financial instruments,
  • Banking, insurance, money lending, debt factoring, hire purchase financing or other financial activities
  • Leasing, including the letting of assets on hire
  • Receiving royalties or licence fees
  • Providing legal or accountancy services
  • Property development
  • Farming and market gardening
  • Activities concerned with forestry and timber production
  • Shipbuilding
  • Coal production and steel production
  • Operating or managing hotels and similar establishments (i.e. accommodation)
  • Operating or managing nursing homes and residential care homes
What if I need more than the £150,000 SEIS limit?

The legislation has been created in the knowledge that many companies will need more than the £150k limit at the time of or some time after a seed investment round. The SEIS maximum of £150k per company does not mean you can't raise more than that in the initial round of funding – it's just the maximum amount on which the SEIS tax relief will be given. Say you raised £250,000 in a first round: eligible investors could get relief on the first £150,000 but none on the balance. However, the rules now allow you to raise £150,000 under SEIS and then raise further equity finance under EIS (enterprise investment scheme). EIS is SEIS's older and bigger brother and it allows individuals to invest up to £1 million per year, and the eligibility rules are much the same except there is no requirement that the trade is under two years' old. Companies can raise up to £5 million a year under EIS.

What are the tax reliefs for investors?

Income tax relief – provided SEIS qualifying shares are held for more than three years either from the date of issue, or commencement of trading, an individual with no more than a 30% equity share in the company can get income tax relief worth 50% of the amount invested. The minimum subscription is zero and the maximum in respect of which a subscriber may obtain income tax relief in any year is £100k.

CGT Relief – No capital gains tax is payable on disposal of the SEIS shares after three years.

CGT Deferral Relief – capital gains tax payable on a different asset can be deferred by offsetting it against the share investment, where disposal of that other asset was less than three years before the SEIS investment or less than one year after it.

Loss Relief – If SEIS shares are disposed of at any time at a loss then the loss can be set against the investor’s capital gains, or his income in the year of disposal or the previous year.

Inheritance Tax Relief – Shares in SEIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax purposes at rates of up to 100% after two years.