SEIS Tax Relief Example

The Seed Enterprise Investment Scheme (SEIS) is a government-backed scheme that is designed to help new businesses raise equity finance. SEIS tax relief benefits are available to investors in return for investing in small and early-stage start-up businesses in the UK. The aim of the SEIS is ‘to stimulate entrepreneurship and kick start the economy’.

SEIS investors can invest a maximum of £100,000 in a tax year which can be spread over more than one company. In return for their investment, the investor can then receive up to 50% SEIS tax relief in that tax year and providing shares are held for the qualifying 3-year period. There is also an exemption for any capital gains tax on an exit.

To qualify for SEIS tax relief, a company must be based in the UK, be no more than 2 years old, trade in an approved sector, have fewer than 25 employees and have assets of less than £200,000. A company cannot raise more than £150,000 in total from SEIS investment.

In the following example, the investor has invested £100,000 in a start-up and pays income tax at 40%.

Initial SEIS Investment: £100,000

In return for the SEIS investment the investor can claim SEIS tax relief which reduces their income tax liability for that tax year. The amount of the reduction is equal to tax at the SEIS rate of 50% of the overall amount invested under SEIS.

Income Tax Relief at 50%: £50,000

Or, if this 50% would exceed the liability for the tax year, the amount of the reduction is whatever amount will reduce that liability to nil.

If however the company the investor holds shares in fails before the end of the 3-year period, any loss suffered by the investor, net of income tax relief, can be set against income of the current year or previous year. The value of the loss is multiplied by the rate at which the investor pays income tax.

So to use the example above:

Initial SEIS Investment: £100,000

Income Tax Relief at 50%: £50,000

Net cost to the investor: £50,000 (£100,000 – £50,000)

Loss Relief: £20,000 (£50,000 X 40%)

Cost to the investor after Loss Relief: £30,000 (£50,000 – £20,000)

Therefore, when the investor chooses to invest the £100,000 in a company, the maximum amount that is at risk should the company fail is £30,000.

If, however the investor receives a certain amount of money from the company when it fails, there will be a clawback of the Income Tax Relief that was initially given to the investor.

The amount of the SEIS tax relief to be withdrawn is equal to the amount of value received from the failed company multiplied by the SEIS rate of 50%. This clawback is capped at the amount of relief received by the investor originally.

HMRC will clawback the relief by raising an assessment for the tax year in which the income tax relief was initially received, rather than the year in which the investor received the value from the failed company.

To use the example above, if the investor receives £1,000 from the failed company, initial income tax relief of £500 (£1,000 X 50%) would be clawed back from the investor by HMRC.

The investor would therefore have to pay £500 income tax back to HMRC, increasing the net cost to the investor to £50,500. They could then claim income tax relief of 40% X £50,500 = £20,200. The cost to the investor after loss relief would therefore be £50,000 – £1,000 + £500 – £20,200 = £29,300.

If after 3 years, the company has not failed, and the investor has received Income Tax Relief in full on the whole of their subscription for the SEIS shares with none of the Income Tax Relief having been withdrawn, the investor will be eligible for disposal relief.

If this is the case, the investor will not have to pay Capital Gains Tax on a gain they acquire from the disposal of their SEIS shares.

Disposal relief is not available on any gain arising on a disposal within 3 years of the date the SEIS shares were issued to the investor. If the investor does sell their SEIS shares within 3 years of the date they were issued, the SEIS Income Tax Relief for those shares they sell will be wholly or partly withdrawn. Any gain the investor makes on the disposal of these shares will be chargeable to Capital Gains Tax.

If the investor makes a loss on the disposal of their SEIS shares at any time, they can set this loss against chargeable gains. In calculating the loss, the cost of the shares must be reduced by the amount of any Income Tax Relief given and not withdrawn.

Continuing the above example, if the investor sold their shares for £60,000 and £30,000 of Income Tax Relief is withdrawn, the allowable loss is calculated as follows:

Disposal Proceeds: £60,000

Cost of shares: £100,000

Income Tax Relief initially received: £50,000

Income Tax Relief withdrawn: £30,000

Income Tax which has not been withdrawn: £20,000

Allowable loss: £20,000 (£60,000 – £100,000 + £20,000).