SEIS tax reliefs: an overview
SEIS is the ‘baby brother’ of the EIS. The tax reliefs are similar but more advantageous to investors as the businesses which are SEIS eligible are start up or early stage companies (less than two years old). Investing in early stage businesses carries significant risk therefore HMRC have introduced a range of generous reliefs aimed for suitably qualified investors.
There are currently five SEIS tax reliefs available to investors in qualifying companies:
1. SEIS income tax relief
The cost of your investment can immediately be reduced by 50% by claiming tax relief on the income tax you have paid, providing:
- You must not be deemed connected with the company; generally speaking, this means not owning (or having owned in the previous two years) 30% or more of the company or being an employee of the company.
- You hold the shares for 3 years from the date of issue or from commencement of trading whichever is the later.
- You have paid sufficient income tax against which to claim tax relief. You can combine income tax paid in the current and previous financial year and claim relief below or up to this amount.
There is no minimum investment per company and the maximum in respect of which an investor may obtain income tax relief in any given year is £100,000.
2. Capital gains tax (CGT) freedom
Providing shares are held for a minimum of 3 years (from the date of issue or commencement of trading) whichever is the later, then no Capital Gains Tax (CGT) is payable.
Shares can be held for longer, so if the company you have invested in is doing well and continues to grow then your CGT free gain may accrue over a longer period.
The potential of realising a CGT free gain by subscribing in a successful SEIS qualifying company can provide investors with an extremely valuable benefit.
3. SEIS capital gains tax (CGT) relief
Capital Gains Tax relief is available for qualifying UK investors who may have realised gains over the last 36 months, or are anticipating gains over the 12 months following investment.
This is achieved by reinvesting a capital gain into an SEIS-eligible company, through which you can claim tax relief that will half your CGT liability. If you invest a taxable capital gain of £10,000 that attracts a CGT liability of £2,000 in an SEIS-eligible company, this CGT liability will reduce to £1,000.
This relief is also limited to investments up to a maximum of £100k per annum. Investors whose interest in the company exceeds 30% may, however, claim CGT relief.
To qualify for Capital Gains Tax relief, investors must be UK residents or in some circumstances it may be available to Trustees who are UK resident.
4. SEIS loss relief against income or capital gains
Investing in private unlisted companies is a high risk / high return investment strategy and share values can also decrease.
If ordinary qualifying shares have been held in the company for the minimum period (3 years from the date of issue or 3 years from the commencement of trade whichever is later) then an allowable loss will arise if;
- SEIS Income Tax Relief has been claimed but not withdrawn.
- Sold at a market value less than the original investment.
The loss can be set offset against;
- Capital gains generated in the tax year that the qualifying shares were sold or thereafter, OR
- Taxable income of the current or prior tax year.
Any additional losses would be carried forward and set against future capital gains.
If the shares were to become totally worthless, then SEIS Loss Relief limits the exposure for an investor who is a 45% tax payer to 13.5 pence in the pound.
Alternatively, the losses can be offset against Capital Gains at the prevailing rate.
5. SEIS inheritance tax (IHT) relief and business property relief (BPR)
Inheritance Tax is charged at 40% on the value of an estate above the “nil-rate band” – an IHT free allowance that is £325,000 in 2017/18, with an additional £100,000 available if an estate includes a main home. Assets that are exempt from IHT – such as SEIS investments – are therefore valuable.
GrowthFunders do not provide tax advice and the information above is intended to provide an overview of SEIS Relief.
The tax relief available will depend on your individual circumstances and may be subject to change. If you are in any doubt about the tax treatment of your investment then you should consult a professional tax adviser prior to making any investment.