SEIS Tax Relief – A Detailed Guide for the UK
Investing in small businesses can be a great way to develop new industries and generate profit, but the risk level can feel daunting for some investors. The SEIS, or Seed Enterprise Investment Scheme, is a UK government initiative that helps minimise this risk by providing tax relief to investors. Read on to learn what tax reliefs are available, how to claim them, and the benefits of SEIS tax reliefs.
- SEIS encourages investment in small businesses by offering tax relief to offset investment risk.
- These tax reliefs include income tax relief, loss relief, CGT disposal, and CGT reinvestment.
- In order to claim SEIS relief, you must invest in a SEIS-approved company with a minimum holding period of 3 years on qualifying SEIS shares.
- You can claim SEIS tax relief when you file your income taxes.
- What is SEIS Tax Relief?
- Benefits of SEIS Tax Relief
- Who can claim SEIS relief?
- SEIS Tax Relief Example
- How to Claim SEIS Tax Relief
- SEIS and EIS Tax Reliefs Comparison
- How is SEIS Tax Relief Calculated
- It’s Easy to Prepare Taxes with FreshBooks
- Frequently Asked Questions
What is SEIS Tax Relief?
SEIS, or the Seed Enterprise Investment Scheme, is a series of government tax reliefs to encourage private investors to invest in early-stage companies. These tax reliefs are intended to reduce the risk that comes with investing in smaller businesses. SEIS and EIS tax relief are similar but involve slightly different risk and relief levels—SEIS is intended for fledgling businesses and offers larger relief incentives, whereas EIS is for slightly more established small businesses. SEIS tax reliefs include income tax relief, inheritance tax relief, loss relief, and SEIS reinvestment relief.
Benefits of SEIS Tax Relief
Explore the different SEIS tax relief options and how you can apply them to maximise profits and reduce your tax burden.
Income Tax Relief
If you’re looking for ways to lower your taxable income, the SEIS income tax relief can offer a significant solution. If you invest up to £100,000 in a SEIS-qualified company, you’re eligible to claim income tax relief on up to 50% of the amount that you invested.
Startups can be a risky investment, but even if they’re sold at a loss, the SEIS can still provide tax relief. If you sell your SEIS company shares at a loss, you’re able to claim this lost amount against your income taxes from the sale year or the income tax bill from the previous year.
CGT Disposal Relief
If your SEIS shares successfully turn a profit, the SEIS capital gains tax exemption and reliefs allow you to keep that full profit. So long as you hold your SEIS investment for a minimum of 3 years, you won’t have to pay capital gains tax on profits from the sale of your gross assets.
CGT Reinvestment Relief
If you’ve sold shares from a non-SEIS company and want to reduce the capital gains from that sale, you can claim reinvestment relief by reinvesting the profits into a SEIS company. Any reinvestments that are placed into a SEIS investment are exempt from 50% of the CGT so long as the SEIS shares are then held for at least 3 years.
Who can claim SEIS relief?
In order to be eligible to claim SEIS investment tax reliefs, you must pay taxes in the UK, be investing in an approved SEIS-qualified company, and hold your shares for at least 3 years. There are also some connections that bar you from eligibility, which fall into 2 categories:
Connection By Financial Interest
If you control the SEIS company you’re investing in, you’re not eligible for SEIS relief. This control includes anyone who has more than 30% of the voting rights or capital invested in the company. It also applies to all family relatives except siblings.
Connection By Employment
Partners and employees in a SEIS company are considered to be too closely connected and are therefore not eligible for SEIS reliefs. This includes trustees and business partners. The exception is directors—while EIS considers directors to be employees, SEIS does not, and they can still receive relief.
SEIS Tax Relief Example
Since you can claim multiple SEIS tax reliefs on a SEIS investment, there are a number of different profit scenarios.
Example 1: The company is stable, and you hold your shares:
- Investment: £20,000
- Income tax relief: £10,000
- Gain: £10,000 tax relief on your income taxes
Example 2: The company does well, and you sell your shares for double:
- Investment: £20,000
- Income tax relief: £10,000
- Profit from sale: £20,000 (zero capital gains tax is applied)
- Gain: £10,000 income tax relief + £20,000 profit = £30,000 total gain
How to claim SEIS Tax Relief
Claiming your SEIS tax relief is simple and usually a quick process. You can begin to claim relief 4 months after the SEIS company starts trading.
- Invest in a SEIS-qualifying company: Confirm with the HMRC that the company is SEIS-eligible and purchase shares in cash worth up to 30% of the company value.
- Receive your SEIS3 form: Companies file for this with the HMRC, then pass the form along to investors.
- Claim your tax reliefs using the SEIS3 form: Not all personal tax filing requires you to submit the SEIS3 form, but you’ll need it if the HMRC requests it. If someone else is submitting your filing, you’ll need to pass along the SEIS3 form so it can be verified by the HMRC.
Ready to make claiming your SEIS reliefs and tax return filing easier than ever? Discover how FreshBooks takes the pain out of tax preparation to learn helpful tips for filing.
SEIS and EIS Tax Reliefs Comparison
Both SEIS and EIS can offer helpful tax relief to investors. Explore the benefits of both schemes to see which is the best fit for your portfolio.
|Scheme||Maximum Investment||Income Tax Relief||CGT Relief/Deferral||Tax-Free Dividends||Tax-Free Growth||IHT Relief||Loss Relief|
|SEIS||£200,000||50%||50% Relief||No||Yes||After 2 Years||Yes|
|EIS||£2,000,000*||30%||Deferral||No||Yes||After 2 Years||Yes|
- *The standard limit for EIS investments is £1m but is increased to £2m if the amount in excess of £1m is invested in a knowledge-intensive company (one that focuses on research, development, and innovation)
- SEIS tax relief rules and other venture capital schemes may change from year to year; it’s important to check with the HMRC before making new investments
- This table offers an overview of SEIS and EIS; both schemes have more detailed rules that should be reviewed before investing
Learn more about these investment schemes with a helpful article on SEIS vs EIS to see which tax benefits are the best fit for your investments.
How is SEIS Tax Relief Calculated
Calculating income tax rates and claiming relief on SEIS investments is relatively simple. Here are some methods for each tax relief:
- Income tax: Income tax relief is equal to 50% of your investment for investments up to £2,000,000. So if you invest £1,000,000, you can claim £500,000 of income tax relief.
- Loss relief: Calculate the amount of your losses, then apply this against your taxable income. If you invest £10,000 and sell for £5,000, you can claim loss relief of £5,000 on your income taxes.
- CGT reinvestment: If you sell shares for £10,000 and invest that £10,000 in a SEIS company, you only have to pay CGT on £5,000 of the initial sale.
It’s Easy to Prepare Taxes With FreshBooks
The Seed Enterprise Investment Scheme offers plenty of tax reliefs for investors to encourage investment in UK small businesses. From income tax relief to zero capital gains on profits from SEIS share sales, you can reduce your tax burden and increase profits with SEIS tax reliefs.
It’s helpful to have clear records of when you invest, so you can make the most of claiming your tax reliefs for the current and previous year. FreshBooks accounting software makes it easy to generate financial records, keep track of your investments, and submit your returns directly to the HMRC. Try FreshBooks free to save time on your accounting.
FAQs About SEIS Tax Relief
Learn more about tax incentives, how SEIS scheme tax relief works, and when you can claim them with answers to some frequently asked questions about SEIS tax relief.
When can I claim SEIS tax relief?
You can claim SEIS tax relief as early as 4 months after the SEIS company starts trading and up to 5 years after the tax year in which you made your investment. You must hold your investments for at least 3 years to claim tax relief, but some reliefs can be claimed sooner.
How far back can you claim SEIS tax relief?
Some SEIS tax reliefs can be carried back to the previous year and used against that year’s income taxes. FreshBooks accounting software makes it easy to keep track of all your investments and profits so you can determine the best time to apply your reliefs.
How does SEIS loss relief work?
SEIS loss relief allows you to claim any losses against your income or capital gains tax, thereby reducing your overall taxes. You can claim loss relief if you sell your shares at a loss or if the company fails and your shares reach zero.
About the author
Levon Kokhlikyan is a Finance Manager and accountant with 18 years of experience in managerial accounting and consolidations. He has a proven track record of success in cost accounting, analyzing financial data, and implementing effective processes. Levon holds an ACCA accreditation and a bachelor’s degree in social science from Yerevan State University. Catch up with him on LinkedIn: https://www.linkedin.com/in/levon-kokhlikyan-34281398/