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 help 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 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.
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.
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 once all the tax reliefs available have been taken into account.
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%|
|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%|
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.
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|
|EIS||£2,000,000*||30%||deferral||no||yes||after 2 years||yes|
|SEIS||£100,000||50%||50% relief||no||yes||after 2 years||yes|
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.