Background Only launched in 2012, Seed Enterprise Investment Scheme (“SEIS”) is the newest addition to the government’s range of schemes that offer tax incentives to investors in order to encourage fund raising into smaller, entrepreneurial UK companies. Whilst the SEIS structure has not been around long, it is very similar to its bigger brother the […]
Only launched in 2012, Seed Enterprise Investment Scheme (“SEIS”) is the newest addition to the government’s range of schemes that offer tax incentives to investors in order to encourage fund raising into smaller, entrepreneurial UK companies.
Whilst the SEIS structure has not been around long, it is very similar to its bigger brother the Enterprise Investment Scheme (“EIS”), which has been around for over 10 years and has attracted £10.7bn (most recent data 2012/13 tax year) of assets.
As its name suggests, the main difference between an SEIS and EIS is that SEIS rules restrict the size of qualifying companies to very early stage, “start up” businesses. Because of the extra risk associated with very early stage companies, the tax incentives for SEIS companies are also more generous than with EIS companies.
Since their introduction, the number of SEIS companies has been growing at an increasing pace, with over 1,100 companies receiving investment to the end of 2012/13 tax year, totalling £80m (Source: HMRC & National Statistics Report Dec 2014). [DAN: These stats are only for first year of SEIS 12/13. £80m first year but grown significantly since although no stats to back up as 12/13 is most recent until Dec15.]
How they work
The rules surround SEIS companies, how they qualify and what they can invest in are broadly similar in philosophy to the rules surrounding EIS companies. [Click here to read my previous article on EIS and how they work]. However, there are some fundamental differences with SEIS companies, including:
- The Small Companies Enterprise Centre (SCEC) decides if a company and share issue qualify and will continue to monitor them to ensure they continue to meet the requirements
- An SEIS qualifying company can raise a maximum of £150,000 under the scheme
- An SEIS company cannot have more than 25 employees, cannot be more than 2 years old and cannot have more than £200,000 assets
- Like EIS companies, certain trades are excluded, including forestry, financial securities among others
SEIS Tax Benefits
Once again these are broadly similar to EIS but with a noticeable increase in the amount of upfront income tax relief offered from 30% to 50%. The enhanced relief reflects the increased risk of investing in very early stage companies.
- 50% income tax relief (subject to a 3 year minimum holding period and a maximum of £100,000 investment in any one year)
- 100% inheritance tax relief after two years
- Capital gains reinvestment relief (if you sold an asset and reinvested all or part of the amount of the gain in shares which qualify for SEIS, half the amount reinvested may be exempted from CGT)
- Profits from the sale of an SEIS investment are completely free of CGT
- Loss relief is available to offset against earnings, unique to SEIS and EIS. The unrelieved portion can be offset at the marginal band of the investor. Therefore a 45% tax payer would have a further 22.5% of the investment returned in the event of a liquidation.
Ways to Access SEIS
SEIS has benefitted enormously from the ever increasing popularity of equity crowd-funding websites. These platforms offer access for private individuals to invest in SEIS opportunities in a self-styled ‘Dragon’s Den’. Unlike EIS and VCT, much of the capital raised has been raised through private investors directly through either the equity crowd funding, or a ‘friends and family’ approach.
Market leaders such as CrowdCube offer an efficient solution to these retail investors, whereas alternatives such as the Seed EIS Platform offer a single company investment solution for the advised market. A combination of factors including the immaturity of the marketplace and increased risk has led to a slower uptake from the adviser community, it remains to be seen if this will change as the SEIS marketplace develops.
Daniel Rodwell, CEO of Seed EIS Platform is positive on the outlook; “Seed EIS continues to gather momentum as the market matures, with a growing number of exciting new businesses benefitting from the scheme. The generous tax reliefs mitigate investment risk significantly, increasing access to seed capital and driving growth and innovation within the UK. Seed EIS Platform enables advisors to offer SEIS and EIS single company solutions to clients, investing alongside our network of sophisticated early stage investors.”
What type of clients are suitable?
If it is true that, as mentioned in my previous article, EIS is not suitable for every client, this is doubly so for SEIS. Due to the investment focus on very early stage companies then the reality for investment in SEIS is that really no one should be investing money they cannot afford to lose.
Due to the lack of liquidity and increased risk of company’s failing in their fledging stages, investments should be viewed as a long-term investment ‘punt’ rather than core part of one’s investment portfolio.
For those clients that can accept this level of risk and have the disposable capital, and like the notion of supporting young British companies with the opportunity of finding the next ‘big’ thing then SEIS can offer a good opportunity to gain access to this area of the market.