What is SEIS, and how is it different from EIS? The Seed Enterprise Investment Scheme is a UK government scheme that offers generous tax reliefs to people who invest in very young companies. It sits alongside the better-known Enterprise Investment Scheme (EIS) but is aimed at businesses at an even earlier stage. This guide explains how SEIS works, the main reliefs available, how it compares with EIS and the risks to understand first.
What Is SEIS?
The Seed Enterprise Investment Scheme was introduced in 2012 to help start-up companies raise their first funding. Because investing in a business at this stage carries a high level of risk, the government offers investors tax reliefs in return for backing these companies and holding their shares for a minimum period.
SEIS applies to new shares bought directly in a qualifying company. The company has to meet a set of conditions, and it is HMRC, not the investor, that confirms whether those conditions are met. Once a company has raised money under SEIS, it can issue a compliance certificate so investors can claim their relief.
What Tax Reliefs Does SEIS Offer?
At the time of writing, the main SEIS reliefs available to investors are:
- Income tax relief: 50% of the amount invested can be deducted from your income tax bill, on investments of up to £200,000 in a tax year. Relief can also be carried back to the previous tax year.
- Capital gains tax exemption: if the shares are held for at least three years and the relief has not been withdrawn, any gain on their sale is free from capital gains tax.
- Reinvestment relief: half of a capital gain made elsewhere can be exempt from capital gains tax if that gain is reinvested in SEIS shares.
- Loss relief: if the shares are sold at a loss or the company fails, the loss, after deducting the income tax relief already received, can be set against income or capital gains.
- Inheritance tax: SEIS shares may qualify for Business Relief once they have been held for two years.
Tax reliefs depend on your individual circumstances, and the rules can change. To keep the reliefs, you generally need to hold the shares for at least three years, and the company must continue to meet the qualifying conditions during that period.
Which Companies Qualify for SEIS?
SEIS is designed for genuinely early-stage businesses. At the time of writing, a qualifying company must generally:
- Be carrying out a new qualifying trade that started less than three years ago
- Have gross assets of no more than £350,000 before the shares are issued
- Have fewer than 25 full-time equivalent employees
- Have a permanent establishment in the UK and not be listed on a recognised stock exchange
- Raise no more than £250,000 in total under SEIS
Certain trades are excluded altogether, such as property development, financial activities and some energy generation. Investors also cannot be employees of the company, and they cannot hold more than 30% of it along with their associates.
SEIS vs EIS: What Is the Difference?
Both schemes encourage investment in smaller unlisted companies, but they target different stages of growth:
- Company stage: SEIS is for start-ups in their first few years of trading, while EIS covers companies that are larger and more established, although still small.
- Income tax relief: SEIS offers 50% relief, compared with 30% under EIS.
- Investor limit: SEIS relief is available on up to £200,000 a year, while EIS allows up to £1 million, or £2 million where the excess goes into knowledge-intensive companies.
- Amount a company can raise: SEIS is limited to £250,000 per company, while EIS limits are much higher.
Many companies raise money under SEIS first and then move on to EIS as they grow.
What Are the Risks of SEIS Investments?
The tax reliefs are generous because the risks are high. Before considering SEIS, it is important to understand that:
- Most start-ups fail: you could lose all of the money you invest, and tax relief only partly reduces that loss.
- Your money is tied up: shares in early-stage private companies are very hard to sell, and you usually need to hold them for at least three years to keep the reliefs.
- Relief can be withdrawn: if the company stops meeting the qualifying conditions, the tax relief you have claimed may be clawed back.
- Dilution: your shareholding is likely to shrink as the company raises more money in later rounds.
- Limited protection: SEIS investments are not covered by the Financial Services Compensation Scheme (FSCS).
What Should You Check Before Considering an SEIS Investment?
Before looking further into any SEIS opportunity, it is worth checking:
- Whether the company has HMRC advance assurance that its shares are likely to qualify
- What the business does, who runs it and how it plans to use the money raised
- How much it has raised so far and how much more it is likely to need
- The company’s filings on Companies House
- How an SEIS investment fits alongside the rest of your portfolio, and how much you could afford to lose
Investors considering SEIS are always encouraged to seek independent financial and tax advice appropriate to their own circumstances before committing any capital.
About New Capital Link
New Capital Link works with experienced and high net worth investors, helping them understand the range of alternative investment opportunities available to them, including EIS and SEIS opportunities. Please read our risk warning before considering any investment.
If you would like to learn more about how SEIS works, get in touch with our team for an informal discussion.
