50% income and capital gains tax reliefs plus longer-term tax savings
“Fortune favours the brave” the Latin proverb goes – a fitting summary of the opportunity SEIS investments present. It can indeed take courage to invest in some of the smallest, youngest companies in the country. However, that courage can be handsomely rewarded.
Besides the potential for growth, the government pays you back half of your investment in tax relief provided you’ve paid enough tax in the same or previous tax year. If the investment works out, the money is all yours to keep with no tax to pay. If the investment doesn’t work out, the government will share the pain by allowing you to take the loss off your income, thereby reducing a future income tax bill.
Here we explain SEIS tax benefits in more detail with examples based on current rules. Please remember though: tax rules can change.
50% income tax relief
Currently each tax year you can invest up to £100,000 in SEIS and receive a rebate of up to £50,000. In addition, the ‘carry back’ facility allows you to use your allowance from the prior tax year and effectively double both investment and tax relief.
To benefit, you must have paid or owe sufficient tax (in both tax years if you are investing across two tax years). To keep the relief you must hold the investment for at least three years.
50% capital gains tax relief
If you have realised a taxable gain (e.g. by selling investments) and invest the proceeds in an SEIS, you can eliminate 50% of that gain. If you are a higher or top-rate taxpayer, that’s the equivalent of paying capital gains tax at 10% rather than the new 20% rate on gains made in the 2016-17 tax year. If the gain arose from the disposal of residential property or carried interest, or your subscription is carried back to the 2015-16 tax year, capital gains tax will be payable at 14% (half of 28%).
Any gains made upon exiting an SEIS are tax free – there’s no capital gains tax to pay, provided you hold the investment for at least three years. This could be particularly valuable if your SEIS portfolio includes a rising star.
However unlike the case with VCTs, dividends are taxable.
Inheritance tax exemption
Two years after you invest, your money falls outside of your estate for inheritance tax purposes – a potential saving of 40%.
If the investments do not go as planned you can offset any losses against income. This means even in the worst case scenario (100% loss) the effective loss can be as little as 17.5% of the original SEIS investment for an additional-rate taxpayer who benefited from both income and capital gains tax reliefs. The example below shows how loss relief works.
Please bear in mind if you’re claiming tax relief on a capital gain from a residential property (other than your main residence) sale, carried interest or are carrying back your subscription to the 2015-16 tax year, the 28% rate of capital gains tax will still apply. In these cases SEIS investments will allow you to claim back half of your capital gains tax (14% or £14,000 in the example), so the maximum effective loss would be even lower – just £13,500.
- Income tax rebate
- Effective net cost (investment less income tax rebate)
- Value of investment on exit
- Gain/loss on paper
- Loss relief (45% taxpayer)
- Capital gains tax saving
- Effective gain/loss (value of investment on exit, less effective net cost and capital gains tax saving, plus loss relief
How do I claim my tax reliefs?
The 50% income tax rebate is generally claimed via self-assessment once you have received your SEIS3 form from the provider. There is often a time lag of about six months between the date of investment and receipt of the form. Capital gains deferral is also generally claimed via self-assessment.
Please remember: tax rules can change and benefits depend on your circumstances. SEIS tax benefits are only available if company maintains its SEIS status.