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Launched on 6th April 2012, the Seed Enterprise Investment Scheme (or SEIS) is designed to spur investment in UK startups and early-stage businesses by offering tax relief for those investing.
The SEIS could be of particular interest to those struggling to raise finance through traditional means (bank loans etc.), as it makes investment all the more appetising for the third-party offering the money.
The main drawback compared to a traditional loan is that you will be giving up equity in your company. However, you won’t be charged interest and there won’t be as much pressure to repay the money as investors will usually allow their equity to mature before cashing out. Securing an investor can be valuable in other ways too.
You can read the full (rather exhaustive) rules in this PDF, however the main requirements for eligibility are as follows;
Under the terms of the SEIS, eligible investors can invest up to £150,000 in a company (this is a lifetime limit). They must take a stake of less than 30% in the company. In return for their investment they can claim 50% tax relief, and also claim exemption from Capital Gains up to certain thresholds.
You may be thinking “Hang on, if the company can only be worth up to £200,000 and the maximum equity is 30%, how can someone invest £150,000? Surely the maximum investment would be £60,000?”
The key here is the difference between the value of the company in a purely monetary sense and the potential value of the company. If an investor decides you are the next Facebook they may value you at £1 million, even though in accounting terms your company only consists of you and your £500 laptop.
The good news if you’re taking on investment from a third party is that all the accounting gymnastics – seeking SEIS approval from HMRC, subsequent issue of SEIS certificates to investors, Capital Gains exemption and the 50% tax relief – can be dealt with by Crunch. You can start the process by contacting your Account Manager.
If you’re wondering if the SEIS is right for your business – and if you’re operating an early-stage tech startup it most likely is – give your accountant a call to discuss it.
The combination of tax reliefs offered under the SEIS can be maxed out to a rather attractive 78% (Income Tax relief of 50%, plus Capital Gains Tax relief 28%), plus no tax on any uplift in the value of your investment (provided you hold the shares for more than three years).
All our accountants have been briefed on the ins and outs of the SEIS and can explain the tax ramifications for potential investors. Although it is a personal tax (rather than company tax) issue, SEIS investments can be dealt with through our Self Assessment service.
We’re fast approaching the end of the tax year on 5th April, and now is usually a good time to get to grips with any tax changes, so you can maximise your tax efficiency for the outgoing tax year and get your business prepared for the new tax year. You’ll also want to stay up-to-date with the rates and thresholds.
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