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Understanding the UK’s Seed Enterprise Investment Scheme

In this article, we’ll explore what is Seed Enterprise Investment Scheme (SEIS UK), eligibility requirements, and everything investors need to know.

If you want to invest as an expat or high-net-worth individual, which is what i specialize in, you can email me (advice@adamfayed.com) or use WhatsApp (+44-7393-450-837).

Seed Enterprise Investment Scheme Explained

Investors in what could be considered too-risky startup businesses can take advantage of tax breaks through the Seed Enterprise Investment Scheme (SEIS), an initiative of the UK government. With this scheme, investors can possibly get their income tax liability for the year they invest waived, which is a powerful incentive.

Investors in small and early stage startups in the UK can take advantage of SEIS’ tax-efficient perks in return for their capital. Its principal objective is to encourage new business formation and entrepreneurial spirit in order to boost economic growth.

SEIS functions in conjunction with the Enterprise Investment Scheme (EIS) but offers more generous tax reliefs, specifically targeting investments in much smaller companies than those eligible for EIS. The scheme aims to assist small, startup companies in securing funding by offering tax reliefs to individual investors who subscribe for new qualifying shares in these companies.

Investors, including directors, can benefit from an initial tax relief of 50% on investments up to £100,000 (or £200,000 for shares issued on or after April 6, 2023), along with Capital Gains Tax (CGT) exemption for any gains on the SEIS shares.

SEIS is tailored for brand new companies, and its shared loss relief element with EIS represents a significant advantage. To qualify for funding through SEIS, companies must be less than 2 years old, possess gross assets of less than £200,000 (or less than £350,000 for shares issued after April 5, 2023), and have fewer than 25 employees.

understanding Seed Enterprise Investment Scheme
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What’s the eligibility for SEIS scheme?

To be eligible for participation in the Seed Enterprise Investment Scheme, the shares issued must take the form of full-risk ordinary shares, devoid of redeemable qualities and without any special entitlements to the company’s assets. SEIS is designed to assist small, emerging companies in securing financial support by providing tax reliefs to individual investors who subscribe to new qualifying shares in these enterprises.

While SEIS complements the Enterprise Investment Scheme and offers more generous tax reliefs than the EIS, it is exclusively applicable to investments in significantly smaller companies than those meeting the criteria for EIS.

A business can’t be more than £250,000 in SEIS funding, have less than 25 employees, be less than three years old, and have gross assets totaling less than £350,000 (or £200,000 for shares issued before April 5, 2023).

If the business is already engaged in a qualifying trade when the investment is made, it must have been going strong for less than three years. Additionally, the trade must not have been fully operational for more than that. The expansion and improvement of the company’s trade must also be considered in the long run.

Investors seeking SEIS reliefs must not hold a substantial interest exceeding 30% in the company, and they must not function as employees (although serving as a director is permissible). A thorough adherence to specified conditions is required from the investor, the company, and the shares to qualify for SEIS reliefs.

How does the seed enterprise investment scheme differ from other venture capital schemes?

When compared to other venture capital schemes, like the EIS, the SEIS’ emphasis and qualifying requirements are very different. To compare SEIS to other venture capital programs, consider the following:

SEIS vs EIS scheme

Small and medium-sized trading enterprises are the target of EIS, while SEIS is more geared towards early stage businesses.

Investors can reap large tax-efficient benefits by helping small and early stage startup enterprises in the UK through SEIS, which offers more favorable tax breaks than EIS.

Firms can receive up to £250,000 through SEIS, but a total of £5 million can be invested through EIS (subject to State aid clearance).

In order to be eligible for SEIS, a firm must meet certain requirements, as we discussed above. Meanwhile, companies are subject to different requirements when applying to EIS.

Individuals can benefit from SEIS by reducing their taxable income and capital gains when they buy new shares in a firm. As an alternative, individuals who subscribe for ordinary shares in cash in eligible companies through EIS can get tax reduction on both their income and capital gains.

Seed Enterprise Investment Scheme tax relief
Photo by Nataliya Vaitkevich

Seed Enterprise Investment Scheme tax relief

The Seed Enterprise Investment Scheme provides a range of tax advantages to investors who choose to invest in small and early stage startup businesses in the UK.

Some key tax benefits include:

  1. Income Tax Relief: Investors have the opportunity to claim a 50% income tax relief on the invested amount in SEIS companies. This relief is applicable to a maximum investment of £200,000 per annum.
  2. Capital Gains Tax (CGT) Exemption: Investors can benefit from a CGT exemption when disposing of SEIS shares for which income tax relief has been claimed and not clawed back. This implies that any gains realized from the share disposal are exempt from capital gains tax.
  3. CGT Re-investment Relief: In cases where income tax relief is claimed, investors can take advantage of CGT re-investment relief, leading to a 50% reduction in capital gains incurred from the disposal of other assets. The reduced gain amount remains non-chargeable and effectively becomes exempt, with a maximum gain reduction of £100,000 per annum.

These enticing tax benefits position SEIS as an appealing investment avenue for individuals seeking to invest in early stage startups while benefiting from substantial tax savings. It is crucial to seek guidance from a tax advisor or financial expert to gain a comprehensive understanding of the specific tax implications and requirements associated with SEIS.

What is the minimum SEIS investment?

Under the Seed Enterprise Investment Scheme, the minimum investment needed varies from one fund to another and from one investor’s situation to another.

While there isn’t a fixed minimum investment amount stipulated for SEIS, it often falls within the range of £10,000. However, there is a cap of £200,000 each tax year that individuals can invest.

Are there any restrictions on who can invest in SEIS?

The Seed Enterprise Investment Scheme imposes specific limitations on the eligible investors.

Here are the key eligibility criteria and restrictions for investors in SEIS:

  • Individual Investors Only: SEIS is exclusively available to individual investors and is not open to companies or corporate entities.
  • Not an Employee, Unless a Director: Investors must not serve as employees of the company unless they also hold a directorial position.
  • Ownership Limit: Investors are restricted from holding more than a 30% interest in the company to qualify for SEIS tax reliefs.
  • Minimum and Maximum Investment: While there is no stipulated minimum investment requirement for SEIS, individual investors face a maximum investment cap of £200,000 per tax year.
  • Linked Loans: Investors are prohibited from having any loans from the company that are connected to their investment within three years of their initial share investment.
  • No Tax Avoidance: SEIS cannot be utilized solely for tax avoidance purposes.

These restrictions are in place to ensure that SEIS investments are made by individual investors who are not directly engaged in the management of the company and to prevent the exploitation of the tax deduction system.

What is the SEIS application process for approval?

SEIS application process for approval
Photo by Anastasiya Gepp

The procedure for seeking SEIS approval involves initiating an application with HM Revenue and Customs (HMRC) to secure quick go-ahead.

  1. Prepare the Application: Commence the process by drafting a comprehensive application, encompassing a detailed business plan, financial forecasts, and other pertinent supporting documents. The application must substantiate the company’s adherence to SEIS eligibility criteria, such as having fewer than 25 employees and gross assets below £200,000 (or less than £350,000 for certain shares).
  2. Submit the Application: Once the application is finalized, it can be submitted to HMRC for evaluation. Submission can occur either through the HMRC portal online or by post.
  3. Wait for Approval: HMRC will scrutinize the application and furnish a decision regarding the company’s qualification for SEIS. The duration for obtaining approval varies based on the application’s complexity and the company’s specific circumstances. Typically, the approval process spans 15 to 45 working days.
  4. Receive Advance Assurance: Upon approval, the company obtains Advance Assurance from HMRC. This confirmation verifies the company’s eligibility for SEIS tax reliefs and serves as a tool to attract potential investors.
  5. It’s imperative to recognize that Advance Assurance does not guarantee that an investment will meet SEIS conditions. However, it serves as an indication to investors that the investment is likely to qualify for tax relief. Companies should initiate the Advance Assurance application at least one to two months before approaching investors, allowing ample time for HMRC approval.

How long does it take to get SEIS approval?

The duration required to secure SEIS approval varies, contingent on the intricacy of the application and the specific circumstances of the company. Typically, the approval process spans from 15 to 45 working days.

For both advance assurance and compliance, HMRC may take 6-8 weeks to approve an SEIS or EIS application, with some instances witnessing approval as swiftly as one week. Straightforward applications, such as those involving a technology-sector company, may take around four weeks to obtain HMRC advance assurance. However, applications with more intricate structures can necessitate a more extended approval timeline.

To expedite regulatory OK, it is advisable to have a well-crafted business plan, submit all required documents, and meticulously complete the application form. Companies are encouraged to apply for advance assurance at least one to two months before engaging with investors, ensuring sufficient time for HMRC to review and approve the application.

What are the common reasons for SEIS application rejection?

Several factors can contribute to the rejection of a Seed Enterprise Investment Scheme application. Firstly, an insufficient demonstration of capital at risk, a crucial SEIS eligibility criterion, may hinder approval. A poorly prepared or unclear business plan is another potential stumbling block, as it should be comprehensive, well-structured, and effectively convey the company’s growth potential and investment utilization plans.

Additionally, the absence of detailed financial forecasts for the upcoming three years can impede the assessment of the company’s financial health and growth prospects. Failure to meet the risk-to-capital condition, requiring a significant risk of loss, could also lead to application rejection.

Simultaneously issuing SEIS and Enterprise Investment Scheme qualifying shares on the same date is discouraged, as SEIS and EIS tax reliefs primarily target external investors for early stage company investment.

Lastly, a lack of clear articulation of growth and development objectives in the business plan may result in rejection, given HMRC’s focus on these aspects in SEIS/EIS application assessments.

Seed Enterprise Investment Scheme pros and cons

The Seed Enterprise Investment Scheme presents a range of advantages and disadvantages for both investors and startups. Here are some of the pros and cons associated with investing in SEIS:

Benefits of SEIS for Investors

  • Tax Relief: Investors can avail themselves of a 50% income tax relief on their investment in SEIS companies, with a maximum investment limit of £200,000 per annum.
  • Capital Gains Tax Exemption: Investors stand to benefit from a CGT exemption when disposing of SEIS shares, provided income tax relief has been claimed and not reclaimed. This exempts any gains from capital gains tax.
  • CGT Re-investment Relief: In cases where income tax relief is claimed, investors can reduce capital gains on the disposal of other assets by 50%. The reduced gain amount remains non-chargeable, effectively becoming exempt, with a maximum reduction of £100,000 per annum.

Pros for Startups

  • Funding: SEIS enables startups to secure financing from individual investors who are intrigued by the company’s potential for growth.
  • Lower Investment Threshold: Unlike the Enterprise Investment Scheme, which imposes a minimum investment limit of £250,000, SEIS does not have a specified minimum investment requirement. This makes SEIS more accessible for early-stage startups.

Disadvantages of SEIS for Investors

  • Investment Limit: Individual investors face a maximum investment cap of £200,000 per tax year, potentially constraining the total amount they can invest in SEIS-qualifying companies.
  • Restrictions: Investors are subject to specific restrictions, including the prohibition from being employees of the company, unless they also hold directorial positions. Additionally, investors must not exceed a 30% interest in the company to qualify for SEIS tax reliefs.

Cons for Startups

  • Limited Funding: Startups are restricted in the amount of funding they can raise through SEIS, with a maximum cap set at £250,000. This limitation may pose challenges for businesses with higher capital requirements.
  • Eligibility Requirements: Startups must adhere to specific eligibility criteria, including having fewer than 25 employees and gross assets below £200,000 (or less than £350,000 for shares issued after April 5th, 2023). Meeting these criteria may be a hurdle for some startups seeking SEIS support.

Bottom Line

SEIS aims to assist small, emerging businesses in securing financial support by providing tax breaks to individual investors who subscribe for new qualifying shares in these companies. The scheme complements the Enterprise Investment Scheme and provides more generous tax reliefs than the EIS but is exclusively applicable to investments in significantly smaller companies than those qualifying for EIS.

SEIS investments are tailored for experienced or affluent investors seeking diversification within their portfolio. They may be particularly appealing to investors with substantial income tax liabilities, offering opportunities for growth. However, akin to all investments, the value and returns from SEIS investments are subject to fluctuations, and investors may receive less than their initial investment. Given the high-risk nature of SEIS investments, they are not suitable for all investors.

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