Experienced Investors

This might be news to you, but back in April 2012 the government put into place an incredibly generous tax relief scheme for people who invest in start-ups. Known as SEIS or the Seed Enterprise Investment Scheme, investors can invest up to £100,000 per annum into new young companies.  With this scheme, investors are protected against the risk involved by HMRC.

This scheme opens the doors of opportunity for many investors and small businesses. It also means that the results of uncertainty are minimized by this innovative program.

Many investors are aware of the Enterprise Investment Scheme and this new scheme looks very similar but delivers more. SEIS or Seed Enterprise Investment Scheme can give 50% income tax relief of up to 50% of the investment amount. Any assets that are sold by the company during this year of tax – 2012/2013 will be covered by capital gains tax relief – but investors have to reinvest with SEIS again to receive this.

The SEIS mirrors the Enterprise Investment Scheme with no capital gains tax to pay if shares in the business are sold for profit after 36 months or more. However, if the company takes a turn for the worst and goes bust, then the investor can claim loss relief at their income tax rate. This is in addition to the income tax relief that they already gained from the investment.

Let’s look at the numbers to see how this works in SEIS:

So you’ve decided to invest £100,000 into a new business. This is the maximum that you are permitted to invest each year. In return for this you will receive £50,000 reduction on your income tax bill.  If the company does well, and you not only make your money back, but you make another £100,000 on top, then you won’t have to pay anything to anybody in terms of capital gains just as long as you reinvest your gain back into another SEIS qualifying company.

If the company goes downhill and bust, then you can offset £50,000 of losses against your income tax bill. For a tax payer on the 45% rate, this will save them £22,500.

In conclusion, this means that if you do well, then your investment could give you great returns. If you don’t do so well, then you are protected to 100.5% of your investment.

Can you select your own business to invest in?

Yes you can, but any business that takes part will need to qualify under the SEIS regulations. These include:

  • The business has to be operating or preparing to operate in particular qualifying trades
  • It must not own more than £200,000 in assets at the time of investment and it must have fewer than 25 employees
  • You are not allowed to own more than a 30% share of the business
  • The business can receive a maximum of £150,000 through this scheme
  • HMRC will check that the business was set up as a means to gain access to this tax relief

Can you give me a financial example of how this works?

Let’s keep this simple and go for this example. You have decided to invest £100,000 in a business using the SEIS program.  You can claim income tax relief of £50,000 for the investment.

The business does particularly well and you sell your shares for double the price that you invested. Normally you’d be expected to pay 28% capital gains tax on your gain of £100,000 totaling £28,000.

Under SEIS you got your income tax relief of £50,000 and of course the capital gains exemption of £28,000. So you have in effect, invested just £22,000 for the return of £200,000. Without SEIS you could have made a profit of 72% but with it, your profit is a whopping 809%.

In conclusion, the SEIS is a very appealing program. It can work wonders for your money whilst you help a new business get started, which in turn will help the economy.