The advantages of SEIS investment

One method of preparing for the future growth of your business is to incentivise your employees. Another is to obtain seed capital from private investors. Although investing in a start-up company has always been a high-risk endeavour and these risks can dissuade even the most daring of investors.  However, because of the advantages of SEIS investment, these have proved to be a powerful incentive for private investment.

The advantages of SEIS investment

Overview of the SEIS

The Seed Enterprise Investment Scheme (or  SEIS  for short) has been based on the existing Enterprise Investment Scheme framework. However it does have the following differences:  

  • One of the advantages of SEIS investment is that a director can invest in the scheme. This is providing you meet the other investor tests, one of the principle ones being that you cannot have more than a 30% interest in the company. This is either in isolation or together with your associates. We discuss who your associates are in detail later on. 
  • The amount a company can raise under the SEIS is limited to £250,000 in total. This limit is restricted where your company has received any other de minimis State Aid.
  • Your company must use any SEIS investment money raised within three years.
  • Your company may have subsidiaries.
  • Any eligibility is by reference to the age of the trade, not the company,
  • It is also possible for former employees to make an SEIS investment.

Conditions required to qualify as an SEIS investment

In order to satisfy the conditions for SEIS relief, qualifying shares in a qualifying company must be issued to a qualifying investor. All these conditions must be met in one of the following periods:

  • The date of incorporation to the termination date
  • The investment date to the termination date.

The termination date is the third anniversary of the date of issue of the shares.

What are qualifying shares?

To qualify for SEIS relief, you must subscribe for new ordinary shares which, at the time of issue and for the following three years, do not carry any present or future preferential rights to dividends, the company's assets on winding up, or the right to be redeemed.

Any bonus share issues, in proportion to your existing SEIS shareholding  will not cause relief to be withdrawn, however you should take care to ensure that any changes to your company's articles or share capital do not trigger a withdrawal of the relief 

What is a qualifying company for SEIS purposes?

To obtain the advantages of SEIS investment a company must fulfil a number of criteria which are listed below:

  • The company must have fewer than 25 employees.
  • It's gross assets must be less than £350.000.
  • The company must have been trading for less than 3 years.
  • No money must have been raised from EIS or VCT investors.
  • Have a permanent establishment in the UK. 
  • It must be carrying on a genuine new trade.
  • Your company must not have used any funds raised to acquire shares in another company or the trade and assets of another entity..

There is also a further 'risk to capital' condition which sets out a number or parameters which need to be adhered to. This measure is intended to prevent artificial investments having no real prospect of risk, benefiting from the advantages of SEIS investment. If you are running a genuine entrepreneurial start-up this is unlikely to have impact on your business.

Who is regarded as a qualifying investor?

A qualifying investor is someone who is not connected to your company. An investor must also not have any linked loans made to them. Broadly speaking a linked loan is one which would not have been made or made on different terms had it not been for the investment made.

A qualifying investor must also subscribe to the company's shares for genuine commercial reasons and not as part of a tax avoidance scheme or arrangement.

When an investor is connected to a company

As mentioned previously, an investor cannot obtain SEIS relief on a share subscription where they are connected to a qualifying SEIS company.

Essentially this means that neither the investor or their associates can be a company employee during the period beginning with the issue of the shares and ending three years after the investment was made. A director is not treated as an employee for the purposes of claiming SEIS.

Associates can include business partners, the trustees of any settlement of which the investor is a settlor or beneficiary and lineal relatives: e.g. spouses and civil partners, parents and grandparents, children and grandchildren. However, brothers and sisters, cousins, uncles and aunts are not considered to be associates.

Additionally, beginning with the company incorporation to the third anniversary of the date of the share issue, an investor cannot directly or indirectly possess or be entitled to acquire a substantial interest, i.e. more than 30% of the company's (or any subsidiary's):

  • Ordinary share capital
  • Issued  share capital
  • Voting rights
  • Rights to assets on a winding up

Those rights of an individual's associates are attributed to the individual for the purposes of the 30% test.

If any of the above applies, then SEIS Income Tax relief will not be available for that investor.

What relief is due on an SEIS investment?

Income tax relief

Individuals who subscribe for shares in a SEIS-qualifying company will receive tax relief of 50% on the cost of the shares, which is offset against the individual's Income Tax liability for the year in which the investment is made the maximum investment an individual can make currently is £200,000 from the 2023/24 tax year onwards.

It is also possible to carry back income tax relief for an SEIS investment and claim relief in the tax year prior to the investment. However you should bear in mind this will be subject to those limits available in the tax year concerned. So for example the limit for the 2022/23 tax year was £100,000 as opposed to the figure of £200,000 mentioned previously. 

SEIS reinvestment relief and CGT relief

Capital gains may be reinvested in SEIS companies to obtain reinvestment relief, which, exempts up to 50% of the earlier chargeable gain from CGT.

Disposals of SEIS shares will be exempt from capital gains tax after a three-year qualifying period, providing that Income Tax relief was given on the subscription. Although where Income Tax relief was not given on the entire SEIS subscription, the CGT exemption is restricted pro-rata, unless full Income Tax relief was not available simply because the taxpayer’s Income Tax liability was too low.

Loss relief

If SEIS shares are disposed of for a loss at any time, the loss after any Income Tax relief has been taken into account can be claimed against your other income for that year and the previous year instead of being offset against capital gains.

A loss can be claimed on the disposal of SEIS shares even if the Income Tax relief has not been withdrawn. The loss is reduced by the amount of any Income Tax relief which remains attributable to those shares sold.

The advantages of SEIS investment for start-up businesses

As well as being attractive to private investors the SEIS has the following benefits for start-up businesses:

Easier access to funding

For a new business, securing initial funding can be very daunting. The SEIS provides an additional option for raising capital, making it more attractive for investors to back early-stage ventures. This increased access to funding can accelerate and enhance business growth and product development.

Business credibility and validation

SEIS-qualified companies can often gain a high degree of credibility due to the rigorous eligibility criteria - particularly when obtaining Advance Assurance from HMRC. The fact that an investor may also be willing to invest in a SEIS-eligible start-up can also serve as a form of validation for the business model and potential for success.

Reduced Financial Burden

As mentioned previously, because SEIS investors can claim loss relief if the business fails, the financial burden on the company is reduced. This allows start-up businesses to focus on growth without the constant fear of bankruptcy in the face of failure.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

Spread the word!

Why Friendly

The Friendly Accountants are Alternative Accountants. Unlike traditional accountants, we look forward - not back.

We work with small businesses and contractors/freelancers who want to embrace the world of online software and the benefits this brings.

So if you'd like to find out more, just give a call or drop us an email - no hard sell.

Just friendly, professional advice!

Who we are

We're a husband and wife team with over 50 years experience of working with small businesses.

So we're in a unique position to understand the challenges that you face every day in your business.

And what's more, we're fully professionally qualified so you can be sure that your affairs are in safe hands.

Copyright 2016 by TFA Accountants Limited