The “Seed” Enterprise Investment Scheme (SEIS) is designed to encourage start-up businesses all the way through to two year-olds. Individuals can invest up to £100,000 per annum in return for shares in a qualifying limited company.
They can then claim income tax relief of 50%, even if they pay tax at less than the 50% rate. Investors can be directors of the company if they so wish and can also own up to 30% of the share capital.
In addition, if the investor has previously made a capital gain on the sale of an asset and that gain is re-invested in a SEIS company, the tax otherwise payable on that gain may be deferrable.
Only when the investment in the SEIS company is sold or otherwise disposed of does the original tax due become payable.
How Does it Work?
For an investor in such a company, the tax savings can be huge. Let's take a simple example:
An Investor (Mr I) has made a gain on the sale of a rental property of £100,000. Assuming Mr I is an additional (50%) rate taxpayer and has used his annual capital gains tax exemption against other gains in the same year, the tax due would be 28%, or £28,000.
Alternatively, if he invests the £100,000 in a SEIS company, he does not have to pay the £28,000 tax due until his investment in the SEIS company is disposed of. He would effectively have an interest free loan of £28,000 from the taxman to invest in the new company and grow his wealth proportionately.
Additionally, and provided he had paid sufficient income tax, he would get an income tax refund of 50% of the value of the investment i.e. £50,000 in this case.
The total tax relief would therefore be 28% plus 50%, making a total of 78%. In other words, a £100,000 investment would effectively cost him just £22,000!
Until 5 April 2014, any gains made during the year ended 5 April 2013 – that are reinvested in an SEIS company – will not be deferred until the SEIS investment is disposed of.
Instead, any reinvested gains will escape capital gains tax altogether.
Furthermore, if the SEIS company should fail before 6 April 2013 and the money invested lost, it should be possible to claim tax relief on the value of the investment – after allowing for the amount of income tax relief already given. In the above case, this would be as follows:
|Original investment||£ 100,000|
|Income tax relief already given||( £50,000)|
|Remaining after tax relief and treated as a net capital loss||£50,000|
Allowable against income tax at the additional 50% rate
|Capital loss of £50,000 x 50% =||£25,000|
In this instance, Mr I would have had the following tax reliefs on his investment:
|Income Tax relief £100,000 @ 50% =||£50,000|
|Capital Gains Tax relief £100,000 @ 28% =||£28,000|
|Capital Loss relief £50,000 @ 50% =||£25,000|
|Total tax reclaimed||£103,000|
That’s a £103,000 tax reclaim on a £100,000 investment. In other words, a tax relief of 103%!
For a higher rate (40%) taxpayer, the figures would be £98,000 or 98%.
It doesn’t stop there. Any increase in the value of the SEIS shares in the company, during the period of ownership, are free from Capital Gains Tax, saving up to 28%.
Using our earlier example, let’s say the £100,000 bought 100 shares of £1,000 each. After 5 years of trading, the company is then sold for a value of £1,500 per share. The profit or capital gain would therefore be:
|Share sale price £1,500 per share x 100 shares =||£ 150,000|
|Original cost £1,000 per share x 100 shares =||(£100,000)|
The tax ordinarily due on the capital gain (ignoring any exemptions or reliefs that may be available) would be £50,000 at 28% or £14,000. For an SEIS shareholding, no tax is payable, saving a further £14,000.
In addition, dividends paid to basic rate taxpayers are effectively tax-free in the hands of the recipient.
Investors and potential SEIS companies must meet certain stipulations, so professional specialist advice should be sought before any action is taken.
If you would like to know more about the Seed Enterprise Investment Scheme, or the original Enterprise Investment Scheme, please email me your questions by clicking the “Send a Direct Message” button below.