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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 provides generous tax reliefs which could help mitigate the impact of investments that don’t work out and amplify the impact of investments that do well. 

Please remember: tax rules can change and benefits depend on circumstances.

Investing in small companies is not for the faint-hearted. Whilst some of these companies might do very well, others will struggle and some will fail. 

The tax incentives the government offers provide a valuable buffer against this risk for Seed Enterprise Investment Scheme (SEIS) investors. They mitigate the impact of investments that don’t work out and amplify the impact of investments that do well. 

Please remember though: tax rules can change and benefits depend on circumstances.

SEIS tax relief at a glance

Income tax relief of up to 50% 

A £100,000 investment could provide a £50,000 saving on that year’s income tax bill. To claim this, you must have sufficient income tax liability in the first place and hold the shares for at least three years. 

Generous contribution allowance 

Invest up to £100,000 per tax year. 

Carry back

Carry back contributions to the previous year, assuming you have the allowance. So if you use both years’ allowances you could potentially invest up to £200,000 in one go. Carry back also gives you the option to offset the tax relief against the previous year's tax bill, so you could potentially get back tax you've already paid. 

Tax-free growth 

You normally pay no CGT when realising SEIS shares, if you have claimed income tax relief on them and the companies still qualify. 

50% capital gains reinvestment relief 

You could reduce the CGT on gains made elsewhere by up to 50%. To benefit, you must have had the income tax relief in the same year.

Inheritance tax relief 

An investment in an SEIS-qualifying company should benefit from 100% relief from inheritance tax, provided the investment is held for two years and at the time of death. 

Loss relief 

If things don’t go to plan, you can choose to offset any loss, less the income tax relief received, against your income tax bill. So, an additional-rate taxpayer could effectively reduce a total loss of £1 to 13.5p with carry back.  

How SEIS tax relief helps reduce any losses and magnify any gains

When you invest £100,000 in an SEIS, because of the income tax relief of up to 50%, the effective net cost could be as little as £50,000. 50% CGT reinvestment relief could provide an additional boost of £14,000 or £10,000 (depending on whether 28% or 20% CGT applies). The table below gives examples of how that – and loss relief – might affect your returns whether your investment does well or badly.

Loss relief allows you to write off any losses against income tax. So, if your investment falls to zero, you could in effect deduct the £50,000 loss from your taxable income. This gives a potential tax saving of £22,500. Add to that up to £14,000 capital gains reinvestment relief and the maximum effective loss could be as little as £13,500. Meanwhile, if your investment grew by 50%, thanks to the tax relief, you could be looking at an effective gain of 114%.

  Investment falls to zero Investment falls by 50% Investment has no growth Investment grows by 50%
Initial investment £100,000 £100,000 £100,000 £100,000
Net cost of investment £50,000 £50,000 £50,000 £50,000
Investment value on realisation £0 £50,000 £100,000 £150,000
Loss relief (45% of at risk capital) £22,500 £0 £0 £0
Effective gain/loss after tax reliefs (£27,500) £0 £50,000 £100,000
Capital gains reinvestment relief £14,000 £14,000 £14,000 £14,000
Effective gain/loss after all tax reliefs (£13,500) £14,000 £64,000 £114,000
Effective gain/loss after tax reliefs (13.5%) 14% 64% 114%
This is for illustration only. It assumes CGT at 28%, as applicable to property and receipts of carried interest. The current CGT rate on disposal of other assets is 20%. Capital is at risk. Tax benefits depend on circumstances and tax rules can change. These figures assume an additional-rate taxpayer.

How do I claim SEIS income tax relief?

You can normally claim SEIS tax relief when you file your tax return. You'll either reduce your tax bill for the year or receive a refund for tax you've already paid. 

See our step-by-step guide to claiming SEIS tax relief »

How do VCT, EIS and SEIS tax reliefs compare?

Maximum investment  Income tax relief CGT relief / deferral Tax-free dividends Tax-free growth IHT relief Loss relief
VCT £200,000  30% no yes yes no no
EIS £2,000,000* 30% deferral no yes after 2 years yes
SEIS £100,000  50% 50% relief no yes after 2 years yes
* Provided anything over £1,000,000 is invested in knowledge-intensive companies.
Tax benefits depend on circumstances and tax rules can change. The above table is a brief outline only: there are more detailed conditions and rules which you should consider carefully before investing.

What happens to my SEIS shares when I die?

SEIS shares are treated like any other shares you buy in the stock market. This means when you die they form part of your estate and can be passed on to whomever you choose. There is one important difference though: SEIS shares could be IHT free. 

Should the death occur within three years from the investment, there is no clawback of any of the tax reliefs. IHT relief, however, could only be available if the shares have been held for at least two years.

Any beneficiary who receives the shares will not benefit from any SEIS tax reliefs, so capital gains tax might be due on any gain compared with the value at the date of death of the deceased.

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