Seed Enterprise Investment Scheme (SEIS)

SEIS is a scheme that works by offering tax relief for investors buying new shares in the business. The incentives are as follows:

1. Potential investors can claim 50% of their investment back as income tax relief. For example, if an investor bought shares for £20,000, they would be able to claim back £10,000 from income tax.

2. If the investor sells the shares after having owned them for over three years, they will be exempt from capital gains tax.

3. If the investor has owned the shares for over 2 years, the shares will not be subject to inheritance tax.

4. If an investor makes a loss on their investment, they can offset this against income tax. The relief they can get is equivalent to the income tax they pay. For example, if an investor pays 45% income tax, they can get 45% of the investment loss back. Therefore, if an investment of £10,000 reduces to £5,000, an investor in this tax bracket will be able to claim £2,250 off their income tax.

5. Investors can get capital gains reinvestment relief. This means they can claim up to 50% of capital gains tax already paid for other non-SEIS investments if they reinvest this money in a SEIS.

The company: 

• must be established in the UK

• cannot be trading on a recognised stock exchange when shares are issued

• cannot control another company (unless that company is a qualifying subsidiary)

• is not and has not been controlled by another company since being incorporated

• should not have more than £200,000 of gross assets when shares are issued

• cannot have been trading for more than 2 years

• must have less than 25 full-time employees, and

• can only raise a maximum of £150,000 through the SEIS scheme

Note that a company cannot receive investment through SEIS if it has already received investment through Enterprise Investment Scheme (EIS) or a venture capital trust.

Investors:

• can only invest a maximum of £100,000 per year under the SEIS scheme

• must be UK taxpayers

• must hold onto the shares for at least 3 years, and

• must not be connected to the company they are investing in (ie be an employee)

For it to qualify as a SEIS investment, the money raised must be used for qualifying business activity. This could be:

• a qualifying trade (these are defined on the Government website)

• preparing to carry out a qualifying trade

• research and development for a qualifying trade

The money raised by the new share issue must also:

• be spent within 2 years

• not be used to buy all or part of another company

• be used to grow or develop your business

While SEIS may not benefit the company directly, it provides a great incentive for investors looking to buy new shares in the company. This will help build capital to help your business as it begins to trade.

As a startup, you can get advance assurance that you are eligible for SEIS funding. This is useful so that investors know that you can definitely offer these tax breaks to the investors. To get advance assurance you need to submit an application to HMRC.

What are the upcoming SEIS changes?

From 6 April 2023, the SEIS investment programme is subject to changes. Specifically companies: 

• can raise £250,000 per year, instead of £100,000 

• can raise SEIS within the first 3 years of trading, instead of the current 2 years 

• must have less than £350,000 in gross assets to be able to raise SEIS, instead of the current £200,000

While the changes won’t come into effect until April 2023, companies may be able to already take advantage of the changes. This is because the SEIS rules apply from the date that shares are issued. As a result, companies can consider raising investment now and then issuing the shares after 6 April 2023. This can be done using a longstop date (ie date that will trigger the allocation of shares to the investor) of six months. By doing this, investors can invest immediately while the shares are only issued after the new SEIS rules take effect. Consider using an Advance subscription agreement to raise such an investment. If you have any questions, Ask a lawyer.