Investors can pick up some great tax breaks by making equity investments directly into new start and expanding companies, and here are eight good reasons to choose the seed investment enterprise scheme (SEIS).
- Income tax relief in a SEIS is 50% regardless of the investors tax rate rather than 30% in the Enterprise Investment Scheme (EIS)
- Executive directors are generally barred from EIS, but can participate in a SEIS providing they keep their shareholding within the 30% restriction – this also applies to shareholders who found a company who cannot normally take part in an EIS
- SEIS has a capital gains tax exemption for investors who sell other assets in the same tax year as they inject capital into the new start company. This reduces the chargeable gain by 50%. EIS investments only qualify for a CGT deferral
- SEIS loss relief provisions give a better overall result than those offered to investors by an EIS. Over the three –year life of a SEIS, if the business fails, the investor has little exposure to loss
- Investing in a SEIS is no more difficult that putting money into an EIS, but the overall cash limits are lower – £100,000 in year one and no more than £150,000 overall
- SEIS poses the problem of valuing shares in the business because the amount a shareholder can hold is capped and the year one investment is capped. Seasoned start-up business shareholders often want more than a 30% slice of the business to cover their time and due diligence as well as providing a decent return on investment
- An EIS company cannot convert into a SEIS to take advantage of a second round of tax breaks, but a SEIS company can upgrade to EIS to increase investment for expansion while offering shareholders renewed tax breaks.
Some conditions apply – like 70% of the SEIS investment must have been spent before switching into an EIS
Paid rather than executive directors can go into the EIS, providing the funding scheme switch is made within three years of the start of the SEIS
SEIS is a relatively new investment concept that allows investors to take up tax breaks for equity rather than debt investments into start-up businesses, providing they meet the strict qualifying criteria policed by HM Revenue and Customs.