Seed Enterprise Investment Scheme

Up to 50% income tax relief is offered to investors to stimulate entrepreneurship.

SEIS

 

Overview

The Seed Enterprise Investment Scheme (SEIS) is designed to help small, early-stage companies raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies.

 

Program Doesn’t Exist in Australia

As recently mentioned in the Financial Review, a dozen of Australia’s largest venture capital funds have agreed to work together to lobby the Turnbull government for start-up investor tax concessions and improved technology education in schools. One of the suggested models was the UK-based SEIS.

A description of the scheme is described below.

Background

The Seed Enterprise Investment Scheme (SEIS) was launched by the United Kingdom government on 6 April 2012 in order to encourage investors to finance startups by providing tax breaks for backing projects they may otherwise view as too risky.

The scheme was introduced in the Chancellor George Osborne’s 2011 Autumn Statement which heralded a big shake up of tax incentives for investors, with the Enterprise Investment Schemes and Venture Capital Trusts also being revamped. Now the Seed Enterprise Investment Scheme has become one of the most revered government-backed schemes ever created in the UK.

 

Objective

Seed Enterprise Investment Scheme (SEIS) offers incentives in the form of tax breaks to investors in return for investment in a qualifying business startup. The scheme offers young entrepreneurs a route to vital funding in the initial stages of their project by effectively minimising the risk to investors.

 

Benefits Of Seed Enterprise Investment Scheme (SEIS)

For Investors

Income Tax Relief
SEIS income tax relief currently equates to 45% of the initial investment. There are no exclusions to this tax break and it can also be spread across the current and previous year’s income tax bill. This is called a “carry-back” and it allows the investor to use any surplus income tax relief for the previous year if the current year’s income tax is reduced to zero.

Capital Gains Tax Exemption
If, after the three year investment period, you decide to sell your shares in the SEIS business you’ve invested in, you will be 100% exempt from tax on any gains you have made.

CGT Reinvestment Relief
If you have other investments separate from SEIS, and you decide to cash these in to reinvest in a project that qualifies for the scheme, your capital gains on these initial investments will be subject to a 50% reduction on tax.

Loss relief
If the chosen investment should fail, the government offer loss relief which can be offset against tax on other income. The loss relief is offset at the level of the individual’s highest income tax rate. The amount invested (minus 50% to take into account the income tax relief) is multiplied by the tax rate to work out the amount that can be claimed.

Inheritance Tax Relief
100% Inheritance Tax relief against the value of the shares is granted two years after the date of the initial purchase.

For Entrepreneur

Access to Capital
Finding a UK bank willing to provide a startup loan to a small business post-2008 is difficult. Finding a loan with an interest that won’t potentially cripple the business within its first two years is virtually impossible. SEIS offers pure capital investment based on equity exchange, so no need to deal with banks.

In the Shop Window
As a high profile scheme endorsed by many of the top UK crowdfunding sites, an SEIS-compliant business will find itself and its services/products placed in front of a huge audience with a vested interest not just in investment, but in innovation.

Even if they decide not to invest, those that come across your business as it seeks funding may come to you in the future to make a purchase or become a client.

Investor Expertise
SEIS has also linked up new businesses with investors that have contacts and expertise in the sector in which they operate. While this particular benefit isn’t officially part of the scheme, often investors will look for services they can personally add value to, and the startup will usually benefit accordingly.

 

Eligibility

Investors
In order to qualify for the benefits on offer through SEIS, it is the investor’s responsibility to ensure the following criteria are met:

  • Investor must hold shares for a minimum of three years
  • Company has to remain SEIS compliant
  • Investor must be over 18 years old
  • SEIS is not to be used for tax avoidance purposes
  • Maximum investment through SEIS is A$100,000 per year*
  • Maximum equity stake in a single company must be under 29%
  • All shares must be bought in cash and paid for in full
  • Investor must not be employed by the company in which they invest

 

Entrepreneur
The following criteria must be met by the company in order to be eligible and remain SEIS compliant:

  • Must be established in Australia
  • Must be fully independent
  • Must be under two years old
  • Must be unquoted before beginning SEIS (not listed on any major stock exchange)
  • Must be within a qualifying trade
  • Must have less than 25 employees

 

Trades
Some of the typical trades of firms accessing funding through SEIS are listed below, although this list is not exhaustive and many other sectors and trades can and do successfully source funding:

  • Tech companies
  • Online marketplaces
  • Biotech
  • Mobile App development
  • Medical research
  • Independent film companies
  • Charities/non-profit organisations
  • Pubs and restaurants

 

Examples of SEIS in Action

Case 1: The company does well and doubles in value

Investment = A$10,000

Income Tax Relief = A$5,000 (you get 50% of your investment back as a tax bill reduction)

Profit from sale = A$10,000

Capital Gains Tax = A$Zero (if you have held the shares for three years)

Tax free return = A$15,000

Case 2: After three years the company’s value is the same

Investment = A$10,000

Profit from sale = A$Zero

Your gain = A$5,000 reduction in your income tax bill

Case 3: The company folds and the shares hold no value

Investment = A$10,000

Income Tax Relief = A$5,000 (you get 50% of your investment back as a tax bill reduction)

At risk capital = A$5,000

Loss relief = A$2,250 (45% of at risk capital)

Your actual loss = A$2,750 (A$10,000 – [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][A$5,000 + A$2,250])

*Pounds have been replaced for Australian Dollars for illustrative purposes only.

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