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What is SEIS - Seed enterprise investment scheme

Updated: Nov 7, 2023


What is the SEIS?

The Seed Enterprise Investment Scheme (SEIS) is a scheme created by the government in 2012/13 to complement and follow the success of the EIS.

In this situation, the goal is to assist smaller, likely younger enterprises in raising financing and growing. As with EIS, investing in a SEIS-qualifying company may result in significant tax benefits.

However, because these enterprises are more hazardous, there are two significant differences:

-SEIS provides a bigger income tax advantage than EIS.

-Capital gains are not delayed under SEIS, but you can reduce the amount of capital gains tax you owe by half.

What kind of companies qualify for SEIS?

A firm must be small and unquoted, have traded for a maximum of two years, have gross assets of less than £200,000, and have fewer than 25 workers at the time of investment to be SEIS-qualifying.

As with EIS, some companies and industries are barred, such as those trading in land, commodities, or shares.

Although the list of exclusions is lengthy, it does provide ample opportunity for investment. App development, music, and film production companies have become attractive investments in recent years.

Single company or portfolio?

You can invest in SEIS in two ways: directly in a single SEIS-qualifying company or indirectly through a fund or portfolio.

Both choices could have a place in the portfolio of an experienced investor.

Investing in a single firm provides an investor with greater visibility and control, but also increases the dangers because the success of your investment is totally dependent on the fortunes of that company.

Investing in a portfolio or fund provides diversification, usually within a specific area or sector. It also provides you with the assurance that a professional manager is investigating opportunities and making investment decisions on your behalf.

On the other hand, you have significantly less control and insight over where your money is invested. Furthermore, the fund manager's expertise has a cost, thus investing in a managed portfolio is typically more expensive than investing in a single firm.

Please keep in mind that all SEIS investments are extremely risky and should only be undertaken by experienced investors. Many SEIS companies will fail, whether through a fund or as a solo investment.

What are the tax breaks?

There is a mix of one-time and recurring tax breaks:

Income tax relief of up to 50%

The growth that is tax-free

Up to 50% Reinvestment of Capital Gains

Inheritance tax exemption

Exit loss relief

Please keep in mind that tax rules can change and that benefits vary depending on your circumstances. SEIS tax advantages are accessible only if the company retains its SEIS status.

If I invest today, when will I be able to claim the income tax relief?

After your shares are assigned and you receive your SEIS3 certificate, you can claim income tax reduction.

SEIS portfolios are typically evergreen, with the fund management allocating shares at regular periods (it is normally possible to get an indication of when the next allotment is planned).

Single company SEIS offerings typically have a closing date, which might be a fixed date or, more commonly, the moment the fundraising target is met. Shares are often distributed shortly after the offer closes.

The investment date for tax purposes will be the date your shares are assigned, not the date you invested.

SEIS3 certificates are granted following allotment and confirmation from HMRC that the SEIS company has met all requirements.

You can claim the tax relief once you have received your SEIS3 certificate(s). You can still claim the relief if you have already filed your tax return.

A claim for SEIS tax relief can be made up to five years after the end of the tax year in which the shares were issued.

How much can I invest in SEIS?

SEIS allows you to invest a maximum of £100,000 per tax year. The minimum investment varies for every fund, however, it is normally in the area of £10,000. There is also a 'carry back' option.

What is SEIS carryback?

SEIS investments provide a "carry back" option. You can elect to have all or a portion of your SEIS shares acquired in one tax year considered as if they were acquired in the prior tax year.

This effectively allows SEIS investors to deduct the tax relief from their previous year's income tax.

This is only possible if you have enough SEIS allowance in the tax year to which you are carrying back.

What returns could SEIS investments offer?

SEIS returns, as EIS returns, will be primarily in the form of capital growth rather than dividends.

Each offer will typically provide a target return, albeit this is merely a guideline and is not guaranteed. Target returns range from roughly 1.3x to more than 10x the amount invested. Larger goal returns typically signal higher risks.

What are the charges?

SEIS fees vary greatly, so it is critical to thoroughly examine this portion of each SEIS offer agreement. Individual SEIS firms may not levy any explicit charges, but administrative and other fees may be deducted as part of the business's operating costs. SEIS managed portfolios typically charge an upfront fee of 5-6% and yearly fees of 2%. In most cases, there will also be a performance charge.

How can I buy SEIS investments?

SEIS investments, like EIS, are not traded on the stock exchange, but you can invest through a specialist broker, such as Wealth Club.

There are numerous SEIS opportunities accessible, including individual companies and portfolios. SEIS portfolio offers may be evergreen, allowing you to invest at any time. Individual company offerings typically have a fundraising goal. When it is accomplished, the offer is usually closed.

How can I sell my SEIS investment?

Because SEIS shares are not traded on the stock exchange, they cannot be sold in the same manner that an investment trust can. Instead, it is the managers' obligation to devise an exit strategy that permits them to return capital to investors as well as any tax-free growth.

At the outset, the manager will normally indicate the desired departure plan and timetable (often four years). Management buyouts, trade sales, and refinancing are all common techniques. There are, however, no assurances.

Please keep in mind that SEIS are long-term investments. The income tax relief must be held for a minimum of three years.

What is SEIS Advance Assurance?

This is a service provided by HMRC that companies wishing to raise funds through SEIS may opt to use (it is not required).

If a company receives Advance Assurance, it implies it has received a letter from HMRC confirming that the company's proposed share issue qualifies for SEIS tax relief based on the facts submitted.

Advance assurance does not ensure that the company will be eligible for SEIS tax reduction. This can only be confirmed after the shares have been issued by the company.

Regardless of whether the company has obtained (or requested) Advance Assurance, it must file a compliance statement to HMRC after issuing the shares. If all of the conditions are met, HMRC will affirm that the company is authorized to issue SEIS certificates.

Who could consider investing in SEIS?

SEIS investments are intended for experienced or rich individuals who want to diversify their portfolios.

They may be especially appealing to investors looking for growth prospects who have a substantial income tax burden.

SEIS may also appeal to investors who owe capital gains taxes, as discussed on the SEIS tax savings page.

What are the key risks?

The value and income from them, like other assets, might fall as well as rise, so you may receive less than you invested.

However, because the SEIS invests in relatively small enterprises, this risk is higher than with conventional investments. Small businesses are more unpredictable and more likely to fail than larger corporations. You could lose the full amount of money you invested.

As a result, SEIS investments are long-term investments that are not suitable for everyone. They are intended for high-net-worth or sophisticated investors who do not require rapid liquidity and can sustain a potential total loss.

Furthermore, because there is no established market for these shares, SEIS investments are less liquid than traditional stock market investments and will be more difficult to sell.

Finally, in order to keep all applicable tax breaks, you must hold the investment for a minimum of three years and the companies must maintain their qualifying status. Otherwise, you may be required to repay the income tax benefit you obtained.

Please keep in mind that all of the tax and product restrictions described here are current but may change in the future. The tax advantages vary depending on the conditions.

What are the main differences between SEIS, VCTs, and EIS?

Despite investing in generally comparable types of companies, there are considerable distinctions between these investments.

For starters, the tax breaks available, the maximum amount you can invest, and the minimum holding term are all different.

Unlike EIS and SEIS, VCTs do not provide a carryback facility: the tax relief can only be deducted against income in the year in which your shares are allotted. There is no inheritance tax advantage with VCTs, nor can losses be offset against capital gains obtained elsewhere.

Second, when you buy in a VCT, you are acquiring shares in the trust rather than the underlying company. So, theoretically, you may sell your shares at any moment and realise your investment, albeit there may be restrictions.

Instead, when you invest in an EIS or SEIS fund, you are acquiring shares in the underlying companies. You cannot normally sell your shares on the stock market because they are not typically listed. You can only profit from your investment if the company is sold, listed on a stock exchange, or refinanced.

Third, unlike EIS investments, VCTs often offer tax-free dividends, which account for the majority of any return to investors.

SEIS, as opposed to EIS, focuses on smaller and younger enterprises. SEIS tax breaks are larger to account for the additional risks.


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