What Are The Tax Benefits Of Investing In A SEIS Startup?

Disclaimer: This article is for information purposes only and does not constitute tax, legal or financial advice. Always consult a qualified professional before making investment decisions.

 

Investing in early-stage startups can be a risky business. Stats show that up to 60% of startups in the UK fail within the first year – and if there’s anything investors don’t like – it’s risk!

But what if we told you that the UK government offers an incentive to help offset that risk? Enter the Seed Enterprise Investment Scheme (SEIS).

 

A Quick Guide on SEIS

 

SEIS was first introduced to encourage more investment into early-stage startups in the UK. In order to combat the risk that comes with investing in these kind of startups, the government announced a suite of tax reliefs so even if things do go wrong, investors still get financial benefits.

That way, investing in startups feels like a win-win: either your initial investment increases in value, or you can reduce your losses with tax breaks.

But what exactly do you get in return for investing in an SEIS startup?

To put it simply, you can invest up to £200,000 per year and get:

• Income tax relief up to 50%
• 0% capital gains tax on profits after 3 years
• 50% capital gains reduction on profits realised on other assets
• The ability to offset any financial losses against income or capital gains
• Inheritance tax relief after 2 years

Want to find out  more? We tell you everything you need to know…

 

50% Income Tax Relief

 

One of the major benefits of the SEIS scheme is that it allows investors who are UK tax payers to claim 50% income tax relief on the amount they invest into a company up to £200,000 – as long as the shares have been held for 3 years.

So, if you invest £30,000 in a SEIS company, you can claim back £15,000 on our income tax bill.

However, there are a few conditions that make an investment qualified. Including:

• A SEIS3 certificate has to be obtained from the company you bought shares in.
• You must be a UK taxpayer
• You can’t invest as a company, only as an individual.
• You can’t own more than 30% of the company.
• You can’t be an employee of the company.

 

 

No Capital Gains Tax On Share Sales

 

If you hold the SEIS shares for 3 years and they increase in value, you won’t pay any capital gains taxes on the profits – even if that profit is in the tens of thousands.

This is a huge incentive because the current capital gains tax rate can be as high as 24%, so this relief is hugely appealing.

You can also avoid paying 50% capital gains tax if you reinvest profits from another asset sale into an SEIS company.

That might sound confusing, so here’s an example:

If you sell a second property and make a gain of £60,000, you can reinvest that £60,000 into an SEIS startup. Because of the 50% reinvestment relief, you will only have to pay CGT on £30,000 of the gains.

 

You Can Claim Tax Relief On Any Losses

 

Startups can be incredibly risky to invest in, so to offset this, SEIS lets you claim any losses against either your income tax bill or your capital gains tax bill.

For example, say you invest £10,000 in a SEIS company. Because of the income tax relief, you get £5,000 back (50% of the investment) once you’ve held the shares for 3 years.

However, if the company fails and you lose the remaining £5,000, you can also claim that against your taxes, which means your actual loss will be much lower.

Because of that, the downside of investing in an SEIS company becomes less intimidating.

 

100% Inheritance Tax Relief (Through Business Relief)

 

One of the other major benefits of SEIS is that the shares might qualify for 100% inheritance tax relief under ‘Business Relief’ rules.

However, not all SEIS shares or situations qualify, so to make sure they do, you must:

• Hold the shares for at least 2 years
• Still own the shares at the time of death
• Make sure that the company that you have invested into is still trading and not listed on any stock exchange

This can be a huge benefit, as the value of SEIS shares won’t be counted towards your estate.

If the initial SEIS investment goes well, this could save your family a lot of money in inheritance taxes.

 

Tax Benefits Of SEIS Startups

 

The Seed Enterprise Investment Scheme (SEIS) is a great incentive for investors to back some of the UK’s most exciting businesses but also benefit from some generous tax reliefs.

For UK taxpayers looking to back early-stage startups, SEIS can be a great way to do this and lower the risks in the process.