Encouraging Investment & Increasing your Take Home: Seed Enterprise Investment Schemes

29 August 2016

To stimulate and support entrepreneurship, HMRC is tasked with offering tax incentive schemes for UK taxpayers who invest in qualifying startup and small, early-stage companies which have permanent establishments in the UK.

Seed Enterprise Investment Scheme (SEIS) is the most tax efficient of the schemes HMRC currently offers.

As well as encouraging investment in qualifying new seed-stage startups companies by providing individuals with 50% of their investment back in income tax relief, a SEIS also potentially enables a contractor to extract funds from their limited company in a tax efficient manner.

In the 2016/2017 tax year investors can benefit from 50% capital gains tax relief on gains which are reinvested in SEIS eligible shares.

Also, any gain arising on the disposal of the shares may be exempt from capital gains tax, and loss relief is available if the disposal results in a loss.

If you realised capital gains during the 2016-17 tax year, SEIS and related reliefs allow you claim up to:

  • 64% of your investment back if the startup succeeds – and you pay no CGT when you sell your shares (hopefully at a massive profit!); or
  • 86.5% of your investment back if the startup fails – significantly reducing any losses you incur when investing in startups

So what would a £5k investment in a SEIS mean and how would it compare to simply just taking £5k out of your limited company.

  • Taking a £5k dividend when your income is already in the higher rate threshold would result in additional income tax of 25% becoming payable, so net in your pocket is actually only £3,750
  • Taking out £5k and investing in a SEIS results in:
    • £3,200 in your pocket straight away via a tax reclaim
    • A further £1,125 in your pocket if the start up fails
    • A further (potentially unlimited) amount if the start-up succeeds

SEIS investments inherently carry risk as they are start-ups, but the illustration above shows that this risk is actually mitigated by the tax reliefs available.

Because SEIS are subject to total investment limits, the investment amounts tend to be small – each investment will only usually be up to £5k. However, there is often opportunity to invest in a number of these in order to maximise tax efficiency.

Please get in touch if you would like further advice on SEIS. We are currently assisting a couple of SEIS start-up companies who are looking for inward investment.

Would you like to know more about SEIS?

Follow this link to contact the team at Source Accounting to find out more