The Seed Enterprise Investment Scheme: How it works
What is the Seed Enterprise Investment Scheme (SEIS), how does it work and how can it benefit your start-up?
Even as small business lending hits record levels, exceeding its pre-recession peak of 2007, and the UK’s alternative finance sector continues to thrive, nearly doubling in the last two years, many small businesses still struggle to access traditional lending from banks – particularly early stage businesses.
With an estimated 5.2 million businesses accounting for 48% of the UK’s employment and generating combined annual turnover of £1.8 trillion, it’s essential that start-ups and small businesses can access the capital needed to grow.
Action point: Need a loan to start a business of your own? See how we can help here and here
The Seed Enterprise Investment Scheme (SEIS) helps early-stage small businesses and entrepreneurs get the funding they need to grow and, consequently, boost the economy.
Below is a summary of how the SEIS works and how it could benefit your start-up:
What is the SEIS?
Launched by the government back in April 2012, the SEIS programme is designed to incentivise investment in early-stage companies by offering tax efficient benefits to investors – in turn boosting economic growth by promoting enterprise and entrepreneurship.
SEIS is very similar to the Enterprise Investment Scheme (EIS), introduced in 1994 but SEIS differs in that it is focused solely on helping small, young companies looking to raise equity finance.
Like EIS, the incentive to investors comes in the form of income tax relief and an exemption from capital gains tax (CGT). This is explained later on under ‘How does the SEIS programme work?’.
Is my businesses eligible for SEIS investment?
To qualify for SEIS funding, you must be a UK-resident and your business must be registered in the UK and not listed on a recognised stock exchange.
Your business must employ less than 25 staff, have traded for no more than two years, have no more than £200,000 in gross assets, and must trade in an approved sector (not in finance or investment).
You can only obtain £150,000 of funding through the SEIS. This is a cumulative limit, not an annual limit and, furthermore, you must not have previously raised money under EIS or venture capital trust (VCT) schemes.
How the SEIS programme works
Investors can receive an income tax relief worth up to 50% of investments of up to £100,000 per annum by investing in a company which meets these SEIS-requirements.
If the £100,000 limit is not utilised, any surplus may be carried back to the previous year.
Shares in a company must be held by the investor for a period of three years, from date of issue, for the tax relief to be retained. If the investor is disposed of within that thee year period, or if any of the qualifying conditions cease to be met during that period, relief will be withdrawn or reduced.
As well as this income tax relief, Capital Gains Tax (CGT) exemption is also available on gains on shares within the SEIS programme, giving investors a further tax break worth up to 28% of their gain.
Here are a few examples to show why the SEIS adds to the attraction of a business for investors:
Karen invests £120,000 via SEIS during 2014/15
Karen invests £70,000 via SEIS during 2015/16
As Karen has not used £30,000 of the £100,000 limit in 2015/16, she can carry back the surplus to the previous year. Therefore, she may obtain full income tax relief for both years. This means she will get a tax deduction of up to £95,000 over the two years, calculated by being 50% x (£120,000 + £70,000).
James sells his shares for £200,000 in June 2016, making a profit (or gain) of £90,000. Providing James makes qualifying investments of at least £90,000 in SEIS shares in the remainder of 2016/17 and all other conditions are met, the £90,000 gain will be completely free of CGT. Note that James does not need to invest the proceeds of £200,000 in order to obtain full exemption from CGT.
Who can invest via SEIS?
The angel investor (shareholder) cannot be an employee of the company (unless they are a director of the company) nor have more than a 30% interest in terms of share capital, voting power or assets.
The shareholder cannot receive any ‘value’ from the company during the three-year qualifying period. However, this does not include receipt of ‘ordinary commercial payments’ such as dividends or reimbursements of expenses if the investor is a director.
Interested in seeking SEIS investment? Read this guide on what to avoid when raising SEIS and EIS finance.