SEIS provide the chance to spend money on doubtlessly high-growth corporations
Their tax reliefs imply that they can be utilized to mitigate earnings and capital positive factors tax
SEIS investments are very excessive danger, so it is best to solely flip to them after utilizing up pension and Isa allowances
In final month’s mini-budget the federal government introduced a rise within the quantity traders can put into seed enterprise funding schemes (SEIS) from £100,000 per tax yr to £200,000, from April 2023. SEIS are a authorities authorised scheme for investing in very early stage small companies and since these are excessive danger, SEIS provide very beneficiant tax reliefs. Which means SEIS can be utilized in quite a lot of methods to assist with tax planning as nicely tapping into potential excessive development – one thing maybe much more related as the federal government is not going to abolish the 45 price of earnings tax.
You may stand up to 50 per cent earnings tax aid on what you spend money on SEIS, supplied you maintain the funding for a minimum of three years. You may carry this aid again to the earlier tax yr that means that some or the entire SEIS shares you purchase are handled as if you had acquired them within the earlier tax yr, in impact, the flexibility to offset tax aid towards earnings tax from the earlier yr. However you may solely do that when you’ve got enough SEIS allowance within the tax yr to which you’re carrying again.
You may declare the earnings tax aid after your shares are allotted, your cash has been invested and also you obtain a SEIS3 certificates from the SEIS firm. This will take about six months to supply, after which you declare SEIS tax aid through your self evaluation tax return. You probably have already filed your tax return, you may nonetheless declare the aid as much as 5 years after the 31 January following the tax yr wherein the shares have been issued.
You probably have, for instance, acquired a big lump sum at retirement, been made redundant, or acquired an inheritance or bonus, SEIS is likely to be a tax-efficient option to make investments it.
However due to the excessive danger of SEIS corporations, it is best to solely flip to them after you’ve got used up your annual and or lifetime pensions allowance, and annual particular person financial savings account (Isa) allowance. And earlier than investing in SEIS think about whether or not tax advantaged schemes resembling enterprise funding schemes (EIS) or enterprise capital trusts (VCTs) may meet your funding and monetary planning wants as these are arguably not fairly as excessive in danger as SEIS.
If particularly you’re simply trying to mitigate earnings tax, or save for or complement a retirement earnings, fairly than mitigate capital positive factors or inheritance tax (IHT), VCTs is likely to be a greater possibility. (Additionally see VCT or EIS: which is finest? IC, 16.04.22).
You may move on SEIS shares after holding them for 2 years IHT-free. However Simon Emary, chief working officer of Growthdeck, a platform for investing in EIS and SEIS, argues that due to their excessive dangers this shouldn’t be the first function for investing in SEIS.
A key advantage of is SEIS is as much as 50 per cent capital positive factors tax (CGT) aid. You probably have made a capital acquire on different belongings and make investments the chargeable acquire in an SEIS firm, you may scale back the CGT you owe on the acquire by as much as 50 per cent. However you can’t declare this reinvestment aid until you’ve got additionally claimed SEIS earnings tax aid in that exact yr.
This could possibly be helpful, for instance, in the event you owe CGT as a result of you’ve got bought property that’s not your major dwelling, a enterprise, or investments resembling shares or funds held exterior an Isa or pension.
Whenever you eliminate a SEIS funding you don’t usually pay CGT on any acquire you made in the event you claimed earnings tax aid on it and the corporate nonetheless qualifies for SEIS tax aid.
Like SEIS, EIS are a wrapper inside which you instantly spend money on unquoted corporations. These allow you to defer CGT owed in the event you reinvest a acquire in them. However you solely pay the CGT whenever you realise your funding in that EIS and in the event you then reinvest this too in an EIS you may defer the tax owed till you realise that one. When you die whereas holding the EIS into which you invested the capital acquire, the CGT legal responsibility dies with you.
“SEIS focuses on even earlier stage companies than EIS,” explains Alex Davies, chief government of Wealth Membership, a service for investing in tax-advantaged investments. “Each are dangerous, however SEIS are riskier than EIS – therefore the tax aid is healthier.”
|SEIS, EIS and VCT tax reliefs|
|Most annual funding (£)||Revenue tax aid (%)||CGT aid/deferral||Tax free dividends||IHT aid|
|SEIS||100,000||50||50% aid||No||After holding for 2 years|
|EIS||2mn*||30||Deferral||No||After holding for 2 years|
|*Offered something over £1,000,000 is invested in data intensive corporations.|
Instance of CGT aid on an SEIS funding
Alison earns £200,000 a yr. If she invests £100,000 of that into an organization which qualifies for SEIS tax aid, she’s going to stand up to £50,000 again on her earnings tax return so, in impact, an funding of £100,000 prices her £50,000. The corporate she invests in grows, and after 5 years is bought and the proceeds are distributed to traders. She will get £300,000 again from the £100,000 funding – a tax-free return of 3x or, with the preliminary tax aid of £50,000, 6x her funding.
Alison bought an funding property in the identical yr she invested within the SEIS, and made a £100,000 capital acquire on it. This implies she owes £28,000 attributable to CGT at 28 per cent. However by investing £100,000 in a SEIS she wipes out half of the CGT legal responsibility, saving an extra £14,000 in tax. This implies the Seis funding of £100,000 has successfully value her simply £36,000 – £50,000-£14,000 – giving her a complete return of 8.3 occasions her funding.
Supply: Wealth Membership