SEIS – tax incentives for seed capital

In a welcome move from the Treasury, the Seed Enterprise Investment Scheme (SEIS) came into force on 6 April 2012. In essence, the scheme allows individuals to invest up to £100,000 as seed capital for a fledging business looking to raise finance. There are some generous tax reliefs available for the individual in exchange for their investment, as follows:

Income tax

  • Up to 50% income tax relief on the amount invested, regardless of the investor’s marginal rate of tax
  • From 2013/14, it will be possible to carry back the investment to the previous year in order to maximise the income tax relief available

Capital Gains Tax

  • Reinvestment relief – For the 2012/13 tax year only, it will be possible to exempt any capital gain on a £1 for £1 basis, meaning further tax relief of up to £28,000 (see example below)
  • Disposal relief –
    • If the SEIS shares are held for at least 3 years there will be no capital gains tax on the disposal of the shares
    • If the company invested in fails, investors can claim loss relief against their general income in the year, to the extent that they have not received income tax relief (see below)

SEIS Case Study
The following example shows how, for an individual in the right circumstances, making an investment under SEIS can be a win/win situation.

Mr A has total income of £300,000. In the 2012/13 tax year and he also sells a buy-to-let property, realising a capital gain of £150,000. He makes an investment of £100,000 under SEIS and receives the following tax relief:

2012/13 tax year – The year of investment

Income tax relief on investment £100k x 50% = £50,000
Capital gains tax relief on £100,000 of gain £100k x 28% = £28,000
Total immediate tax relief £78,000

2016/17 tax year – The SEIS company is liquidated and Mr A receives no return on his investment

Loss on investment = £100,000
Less: Amount claimed as income tax relief in 2012/13 (£50,000)
Loss available to set against 2016/17 income £50,000

Based on the rate of income tax coming into force from 2013/14, an additional rate taxpayer would receive relief at 45% (£50,000 x 45% = £22,500), so the overall position becomes:

Initial investment £100,000
Total relief received: – 2012/13 £78,000
– 2016/17 £22,500
(£100,500)
Investor’s return £500

As shown above, even in the worst case scenario of the SEIS investment failing the investor still makes an, albeit small, return on their original investment.

Please note that the example above is merely an illustration of a particular scenario in which, in particular, an individual makes a £100k+ chargeable gain in the 2012/13 tax year and advice on your individual situation should be sought before any action is taken.

If you would like to make an SEIS investment but are unsure of how much to invest in order to make your investment tax efficient, or would like some general advice on the tax relief available on SEIS investments, please contact us.

The Tax Advisory Partnership is a member firm of the Chartered Institute of Taxation (CIOT). We are not Financial Advisors and are not regulated by the Financial Services Authority (FSA). Where appropriate we will work with your Independent Financial Advisor or we can introduce you to an IFA we have worked with in the past who can take care of the FSA aspects of any advice you require. However, our focus is on ensuring that any investment strategy you may select meets with your overall financial and taxation objectives.