SEIS tax relief: guide for investors

Get in at the ground floor of the next tech unicorn, cash in big at exit. That’s the ideal scenario. But the less established a company is, the less information you have to guide your decision to invest or not.

Luckily, the UK government sweetens the deal for investors who help risky, early-stage companies off the ground. HMRC’s Seed Enterprise Investment Scheme (SEIS) offsets some of the unknowns by giving investors generous tax relief.

How does SEIS tax relief work?

SEIS is just one of the UK government’s venture capital schemes that incentivise private independent investment into younger companies.

Through forms of tax relief, these schemes encourage investors to support early-stage startups. These startups tend to carry more risk than traditional investments like property and the stock market, but will go on to innovate, create jobs and grow the economy – all things the UK government is keen to promote. As a reward, the UK offers very appealing tax incentives to help lower the risk involved in startup investing.

You can claim tax relief from multiple venture capital schemes in the same year, so, for example, you can claim both SEIS and EIS tax relief at the same time.

Because SEIS is designed to support small, seed-stage businesses – aka, the very riskiest ones – it offers some of the most generous perks to investors of all the venture capital schemes.

SEIS and Income Tax relief

Under SEIS, you get 50% back of the amount you invest as a reduction in your Income Tax bill.

For example, say you invested £10,000 in an SEIS-eligible company. When you file your tax return, you list the details of your SEIS-qualifying investment to reduce your Income Tax bill by £5,000.

Capital Gains disposal relief

When you come to sell your shares, usually you’d pay Capital Gains Tax on the profit you make. With SEIS, you get to keep it all, paying 0% CGT tax no matter how small or large the eventual exit.

Capital Gains reinvestment relief

You can offset 50% of Capital Gains Tax charges when you reinvest taxable profit made to a non SEIS-eligible company into an SEIS-eligible company.

Loss relief

If you haven’t made a profit when you come to sell your shares, you can set that loss against your Income Tax bill. See an example of how that works on this gov.uk page.

Inheritance Tax relief

SEIS shares aren’t subject to Inheritance Tax, so long as they have been held for 2 years.

SEIS tax relief examples

When can you claim SEIS tax relief?

You can claim SEIS tax relief up to five years from the 31 January that follows the tax year in which you made the investment. It’s 31 January because that’s the deadline for self assessment tax returns.

If you don’t use all of your SEIS allowance (£200,000 per year), you can’t carry forward the SEIS limit to the next year.

But you can carry back SEIS tax relief to the previous year, if you haven’t already invested the maximum allowed under the scheme in that year.

How to qualify for SEIS tax relief

To benefit from SEIS tax relief, you have to be a UK taxpayer.

There are various rules for both companies and investors. These rules exist to protect the spirit of the scheme – to reward investors for taking a risk on a small, newly established company that’s otherwise unconnected to their own financial interests.

SEIS rules for investors

• the investor can’t be an employee or substantial stakeholder (over 30%) in the company.
• the investment must represent a genuine risk to the investor. That means no agreements to swap investments for the tax relief, or other tax avoidance practices
• there’s a cap to the amount you can invest under the SEIS scheme per year across SEIS-eligible companies. It’s £200,000 per investor per tax year. Similarly, companies have a limited amount of SEIS they can allocate: £250,000 over their lifetime.
• you must pay for the shares upfront
• you have to keep the shares for at least three years from the date the shares are issued, and you can’t receive ‘value’ from the company during that time (see box below)

See SEIS rules for investors for a full explanation of the rules.

What companies can you invest in under SEIS?

SEIS rewards investors for supporting small, seed-stage startups.

To meet SEIS status, companies must:

• Have been trading for less than 3 years
• Employ fewer than 25 people
• Have no more than £350,000 in gross assets
• Have a permanent establishment in the UK
• Not carry out an excluded trade. This includes banking, insurance or property development

For full details, see our article for startups on the SEIS company criteria.

How to claim SEIS tax relief

The investee company completes the SEIS compliance process

So, you’ve found SEIS-eligible companies, checked they have SEIS Advance Assurance, completed the negotiations, and invested.

What happens next? How do you actually get the tax relief you were promised?

 1. The investee company fills in a compliance statement (SEIS1 form)

There are rules about when the company can complete the compliance steps. HMRC accepts compliance statements after the company has carried out their qualifying business activity for at least four months, or spent at least 70% of the SEIS amount raised.

 2. HMRC sends back two confirmation documents for the company to pass on to investors (SEIS2 and SEIS3)

Typically, HMRC reviews the company’s compliance application in about 15 to 45 working days.

To approve SEIS-qualifying status, HMRC sends the investee company two documents:

• SEIS2 – this is a letter containing the Unique Investment Reference (UIR) number for this share issue. The company needs to tell you the UIR so you can claim tax relief as an investor.
• SEIS3 – this is a blank SEIS compliance certificate. The company fills it in for each of their investors (with the UIR) and sends it to you. The SEIS3 is proof that your investment is eligible for SEIS tax relief.

Investors, claim tax relief through your annual self assessment tax return

Claim your SEIS tax relief when you fill in your annual self assessment tax return. On the Additional Information page, under ‘Other tax reliefs’, enter the total you’ve invested in companies under SEIS (and any other Venture Capital Scheme you’re applying for).

How to claim SEIS loss relief

If things don’t go as planned and you make a loss on your investment, you can claim loss relief. Loss relief allows you to offset a loss, minus any income tax relief you’ve already had from HMRC, against your income.

If you’re claiming the loss for the current tax year, you can contact HMRC to request a change to your PAYE tax code or make an adjustment to your Self Assessment tax payments.

If you’re claiming the loss for the previous tax year, make the claim on your Self Assessment tax return. See full details on how to claim SEIS/EIS loss relief at the gov.uk website.

When can you claim SEIS loss relief?

When the company isn’t profitable and isn’t able to raise more, founders broadly have three choices: to sell, to go into zombie mode (reduce burn to zero, meaning no productivity or revenue) or to shut down. The route they take affects whether you can claim loss relief.

The company is sold

Is loss relief available?

• Yes, you can claim loss relief if you receive less for your shares than you paid for them.
• BUT… note that if the company is sold within 3 years of your investment, you will lose the original SEIS/EIS tax deduction that you had previously claimed and will need to repay that to HMRC. So you’ll lose your original SEIS/EIS tax deduction, but still be able to claim the usual loss relief when selling shares at a loss.

Conditions:

• As an SEIS/EIS investor, you’ll qualify for loss relief if you sell your shares at a lower price than you paid.
• The loss relief depends on what Income Tax relief you received when you bought the shares and whether HMRC has withdrawn any of your Income Tax relief.
• There’s no minimum or maximum time that you must have held your shares.

The company goes into zombie mode

Is loss relief available?

• No, because you’re still holding on to your shares, nothing has been sold.
• BUT… you may be able to make a negligible value claim and be able to claim a loss, even if you’re still holding your shares.

The company shuts down (voluntary liquidation)

Is loss relief available?

• Yes

Conditions:

• As an SEIS/EIS investor, you might be eligible for loss relief if the company is voluntarily wound up for genuine commercial reasons.
• The loss relief depends on what Income Tax relief you received when you bought the shares and whether HMRC has withdrawn any of your Income Tax relief.
• There’s no minimum or maximum time that you must have held your shares.

In this video, SeedLegals co-founder and CEO Anthony Rose looks at how each of these three strategies affects loss relief for SEIS/EIS investors, and how companies can give them the best outcome for supporting them on their journey.

How do SEIS funds work?

If you don’t want to manage the investment process yourself, you can still benefit from SEIS tax relief by investing in an SEIS fund.

SEIS funds pool money from investors to spread across a portfolio of SEIS-eligible companies. The fund is responsible for due diligence and making sure that the companies in the portfolio qualify for SEIS.

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