The Seed Enterprise Investment Scheme – or SEIS for short – is a tax investment scheme that can help founders raise funds and investors support startups. Introduced in 2012 to complement the EIS, it incentivises investors to fund early-stage companies by offering tax breaks on these investments and their returns. Taken advantage of properly, it can be a win-win for both parties – but how does it work?
In our ultimate guide to SEIS, you’ll find everything you need to know – the basics, the rules, the benefits, and more – whether you’re an investor or a founder.
Sounds good? Let’s get into it.
What is SEIS?
SEIS provides extensive tax reliefs for tax-paying investors who support small, early-stage companies in the UK.
SEIS investors can claim tax relief on 50% of investments up to £200,000, and are exempt from any capital gains tax (CGT) on any gains.
Funding small, early-stage companies is risky – so the tax breaks are particularly generous in order to attract more investors to support them.
In doing so, it helps founders raise the capital that they need – and stimulates growth and innovation in the UK startup scene.
How does the SEIS scheme work?
SEIS offers tax reliefs to individual investors who fund small, early-stage businesses that are just starting to trade.
Investors are allowed to make an SEIS maximum investment of £200,000 per tax year. Businesses are allowed to receive a maximum of £250,000 through SEIS – note that this figure includes any de minimis state aid received in the three years up to and including the date of the investment. Any later investments made through other venture capital schemes will also have to take this limit into account.
There are several rules to follow to make sure that the scheme is made use of correctly – we’ll cover these below. They have to be followed for at least three years to make sure investors are able to take advantage of the tax breaks offered.
What are the benefits of SEIS?
In a nutshell, the seed enterprise investment scheme encourages private investors to invest in early-stage businesses. For founders, this makes the often-difficult task of attracting investment to a small business easier. If the investment works out, investors will enjoy generous tax relief on their gains – and some support if it doesn’t, too.
Here’s a summary of the benefits of the seed enterprise investment scheme for investors:
- Income tax relief
- Capital gains tax relief
- Loss relief
- Inheritance tax relief
- Increased return on investment
- Diversification of investment
The seed enterprise investment scheme also has major benefits for founders:
- Easier access to funding
- Lower cost of capital
- Tax breaks for existing investors
- Increased interest from new investors
What kind of companies qualify for SEIS?
It’s important to check that SEIS investments are right for the company. To qualify for SEIS, a company must be:
- Based in the UK, and have a permanent establishment in the UK
- Too small to be listed, and not planning to list within two years of the SEIS investment
- Fewer than 25 full-time employees
- Less than £350,000 in gross assets
- Have traded for a maximum of two years
- Not have received any previous investment under the EIS or VCT schemes
It’s important to note that there are several types of company that are excluded from the SEIS scheme, including:
- Companies in financial or banking sectors
- Companies that are involved in legal or accounting services, property development, or farming
- Companies that are subsidiaries or part of a larger group of companies
- Companies that are carrying out a qualifying business activity such as investment, property management or professional services
What SEIS tax reliefs are available?
The tax reliefs offered through SEIS are extremely generous, to offset the risk of investing in an earlier stage company:
- Income tax relief: investors can claim 50% income tax relief on the amount invested in eligible SEIS companies, up to a maximum investment of £200,000 per tax year
- Capital Gains Tax exemption: if an investor holds SEIS shares for at least three years and sells them at a profit, any capital gains made are free from CGT – making the potential return on investment even higher
- Capital Gains Tax reinvestment relief: investors can delay any capital gains tax they may be liable for when selling shares, by reinvesting the gains into SEIS-eligible shares within the same tax year
- Loss relief: if the investment results in a loss, it can be offset against the investor’s income or capital gains to reduce their tax liability
Inheritance tax relief: any investment made in SEIS-qualifying companies should be exempt from inheritance tax after it has been held for two years, and is held at the time of death
SEIS for investors
What are the SEIS rules for investors?
Wondering about SEIS investor eligibility? Here’s a qualifying list:
- The investor must be UK tax payer; paying income tax in the UK
- The investor must be over 18 years old
- The investor must not be employed by the company they invest in, unless they’re also a director
- They must be able to pay for the shares in cash, and in full
- The investor and their associates – for example family members or spouses – cannot together hold more than 30% of shares in the SEIS company
- The investor must hold shares for a minimum of three years to qualify for CGT exemption. They also can’t be used as collateral during this time
- The investor must not be using the scheme for tax avoidance purposes
They tend to be most attractive to experienced investors looking to further diversify their portfolios and take advantage of growth opportunities. They hold obvious appeal to those with significant income tax and/or capital gains tax liabilities – although it’s important to note that the aim of the scheme is to support young businesses and stimulate growth, not to help investors pay less tax.
What are the benefits of SEIS for investors?
SEIS offers a range of benefits for investors looking to support early-stage startups and benefit from tax incentives and potential high returns:
- Income tax relief: SEIS provides income tax relief of up to 50% of investments up to £200,000 per tax year, allowing investors to claim back a significant portion of their investment as income tax relief
- Capital gains tax exemption: investors who hold their SEIS shares for at least three years are exempt from capital gains tax on the sale of those shares, which can significantly boost investment returns
- Loss relief: investors can claim against their income tax if their SEIS investment opportunity results in a loss, reducing their overall tax liability
- SEIS reinvestment relief: if an investor reinvests the proceeds from SEIS shares into another SEIS-eligible company, they can defer their capital gains tax liability until they dispose of the new investment
- EIS carry forward relief: any excess SEIS investment can be carried forward to the following tax year and qualify for EIS tax relief
- Inheritance tax relief: if an investor holds onto SEIS shares for two years from the date of issue, then these shares become exempt from Inheritance Tax
Portfolio diversification: by investing smaller amounts, potentially across several companies, through SEIS investors can mitigate risk by diversifying their portfolio
What are the risks of SEIS for investors?
SEIS does come with potential risks for investors:
- High risk: SEIS investments are, by nature, high-risk, as they involve early-stage startups. These have a higher chance of failing, which could result in the investor losing their entire investment or getting back less than they put in
- Longer-term investment: as these shares are riskier, investors will want to hold them long-term to maximise chance of returns. They have to be held for a minimum of three years to take advantage of the tax reliefs. This will not appeal to every single type of investor
- Illiquidity: SEIS investments may be difficult to sell, as there is no recognised market for these shares. This can limit the investor’s ability to access their capital
Limited capital loss relief: while SEIS investments offer tax relief on income and capital gains, the relief available for capital losses is limited. If the investment results in a loss, the relief may only be against the investor’s income tax liability
How is SEIS tax relief calculated?
The amount of SEIS tax relief is 50% of investments up to £200,000. This means that investors can receive up to 50% of their investment amount as a deduction from their income tax bill.
To calculate the amount deducted from your income tax bill, multiply the amount invested into the company by 50%. If you’re investing via a fund, you’ll need to subtract the upfront fund fees from the amount.
How do you claim SEIS tax relief?
Once the company has been trading for a minimum of four months, or it has spent 70% of the investment, you are able to claim tax relief:
- Get a certificate (called an SEIS3 certificate) from the company you invested in confirming that it meets the SEIS requirements
- Include the SEIS3 form and any other information about your SEIS investment on your tax return
- It’s worth noting that HMRC may want to see the form – even after the tax return – so keep a record of your investment and claim
- The relief may be claimed up to five years after the 31st of January after the investment
- It’s recommended that you speak with a professional such as an accountant or tax adviser to ensure you are eligible and to assist with the process.
How do you invest in SEIS?
There are two ways to invest in SEIS: through an SEIS fund or portfolio, or directly in a company. Find out which option is best for you below:
- Through an SEIS fund or portfolio: investing through a fund or portfolio provides an opportunity to diversify, usually within the area that the fund or portfolio specialises in. It tends to be less time-intensive, as a fund manager will decide on the companies to invest in. On the other hand, the investor will have far less control and visibility over their investments and will have to pay a fee to the fund or portfolio.
Investing directly in a qualifying company: investing directly in a company gives control and visibility, but has even greater risk due to the lack of diversity
How much can you invest in SEIS?
The maximum amount individual investors can invest in SEIS companies is £200,000 per tax year.
How long do you have to hold SEIS shares for?
To be eligible for SEIS tax relief, an investor must hold the shares for a minimum of three years. If the shares are sold before the three-year time limit, then the investor may not benefit from the full tax reliefs available. It’s therefore important that any investor interested in the scheme is comfortable with holding these shares for at least three years, and potentially longer to maximise returns.
If you are an investor looking to benefit from some of these tax relief schemes, you can explore SEIS / EIS eligible business that are currently raising capital on Seedrs now.
SEIS for founders
What are the benefits of SEIS for founders?
The main benefit of SEIS for founders is that it makes it easier for them to secure longer-term investments for their early-stage businesses, which can sometimes be hard to raise for due to their high-risk nature:
- Easier to secure funding: SEIS offers investors up to 50% income tax relief on investments up to £200,000 per year, which makes your startup more attractive to fund
- Encourages investors to hold onto shares: if investors hold their SEIS shares for at least three years, they are exempt from capital gains tax. This can support the longer-term growth of your startup
- Higher level of financial security for investors: SEIS allows you to offer a reduced financial risk for investors in your startup, as they’re able to claim back some of their money if the company fails
Companies can raise up to £250,000 through the scheme. It’s worth noting that the funds must be used within three years and investors cannot benefit from the tax reliefs until 70% of the funds have been spent, or the business has been trading for four months.
Is your business eligible for SEIS?
A business needs to tick a number of boxes to achieve SEIS eligibility. Most of these ensure that it is an early-stage business of a certain size.
To meet the criteria for SEIS, your business must be a UK-based trading company that has been trading for less than two years. It must have fewer than 25 employees and gross assets of less than £350,000. It must not be trading on a recognised stock exchange and have no arrangements to be a quoted company or a subsidiary of one.
The amount of de minimis State Aid received by the company can’t exceed £250,000, and it cannot have any other VC or EIS investment.
How do you get SEIS funding for your business?
- Apply for Advanced Assurance (recommended)
Once you’ve established that you’d like to get SEIS funding for your business, and that your business is eligible for the scheme, we’d recommend getting Advanced Assurance. Advanced Assurance is written proof that HMRC agrees your business will qualify for SEIS.
It’s not essential, but many investors require it before they make an investment so they have the guarantee of receiving the scheme’s tax benefits. Having Advanced Assurance is a way to attract more investors from the outset.
You can apply for Advanced Assurance on the HMRC website. You’ll have to fill in a form to show your business meets the criteria for the scheme. It’s worth noting that you’ll have to provide the details of one potential investor if you haven’t received venture capital scheme investment before. This is to defer any speculative applications.
HMRC provide a checklist to work through, to make sure you have everything you need and save time on your application.
- Complete your funding round
If you’re approved for Advanced Assurance, you’ll be issued with a statement saying your business is likely to qualify for SEIS, which you can show to investors when offering SEIS opportunities.
- Submit your SEIS1 compliance form
Once the funding round is complete, you’ve issued your shares, and you’ve been trading for four months or have spent 70% of your investment, the next stage is to submit a SEIS1 compliance form to HMRC.
This is to check that you have spent the investment appropriately. If you’ve received Advance Assurance, you only need to provide documentation of anything that’s changed since your application.
If you haven’t received Advance Assurance, you’ll need to provide the following information:
- A business plan and financial forecasts
- A copy of the latest accounts
- An explanation of how you meet the risk to capital condition
- An up to date copy of the memorandum and articles of association
- The information memorandum, prospectus or other documents used to explain the fundraising proposal to your investors
- Details of any other agreements between your company and the shareholder
- A list of the amounts, dates and venture capital schemes under which you’ve previously received investment
- Any other documents to show you meet the qualifying conditions for SEIS
Note that this form must be submitted by the company secretary, a director or an agent.
- Issue certificate to investors
You’ll then receive a compliance certificate which you can issue to your investors – and they can claim their seed enterprise investment scheme tax reliefs. Job done.
What is the SEIS Risk to Capital Condition?
The Risk to Capital Condition was introduced by HMRC in 2018 to make sure that SEIS or EIS schemes genuinely encourage investment in early-stage startups, and will help these businesses grow and develop – rather than to help investors with tax planning or preserving their capital.
The Risk to Capital Condition has two parts, both of which a company must meet in its application:
- For an investment to be viable, the company must have growth and development goals over the long term
- The investment must have a substantial risk of the investor losing more capital than the gain as a return – even after taking the tax reliefs into account
What type of shares are eligible for SEIS relief?
Eligible shares must be new, ordinary, non-redeemable and have no special rights attached. Investors must pay for them in full and in cash only to qualify for seed enterprise investment scheme tax reliefs. The shares cannot be paid for with a loan if the sole purpose of taking the loan is to buy the shares.
Are you a founder and looking to raise funds through the crowd? Apply to raise on Seedrs and one of our team will be in touch.
Seed enterprise investment scheme (SEIS) FAQs
What is SEIS carry back?
SEIS carry back is the ability to ‘carry back’ your SEIS relief to the tax year before your SEIS investment. Providing you have not exceeded your SEIS relief limit for the year before the investment, all or part of your SEIS shares acquired in one tax year can be treated as if they were acquired the year before. This allows SEIS investors to offset the tax relief against income tax from the previous year.
How can I sell my SEIS investment?
SEIS shares must be held for at least three years, otherwise you will not benefit from the full tax reliefs. As they’re not traded on the stock market, the manager must create an exit strategy to return any capital and tax-free growth. Exit strategies include refinancing, trade sales or management buyouts; they will usually be defined at the start of the investment by the manager.
Can a director benefit from SEIS?
Yes: Directors, managers of the company, and those who are able to control over 20% of the ordinary share capital of the business can all benefit from SEIS tax relief.
What is the minimum holding period for SEIS?
The minimum holding period for SEIS shares is three years. If the shares are sold before the three-year mark, then the owner may not benefit from the full tax reliefs.
How much can you raise under SEIS?
Founders can raise a maximum of £250,000 through SEIS. This includes any other de mimis state aid received in the three years leading up to and including the date of investment, and will count towards any limits for investments through venture capital schemes at a later date.
Are SEIS dividends taxable?
Yes, SEIS dividends are taxable; to what extent will depend on the individual investor’s circumstances. However, SEIS investors do enjoy income tax relief of up to 50% on their investment in a qualifying company.
What is the tax break on SEIS?
SEIS investments have several tax breaks:
- Income tax relief: 50% income tax relief on the amount invested, up to a maximum on £200,000 per year
- Capital gains tax exemption: if an investor holds shares for at least three years, any capital gains are tax free
- Capital gains tax reinvestment relief: investors can delay any capital gains tax by reinvesting the gains into SEIS-eligible shares in the same tax year
- Loss relief: if the investment results in a loss, it can be offset against the investor’s income or capital gains to reduce tax liability
- Inheritance tax relief: any investment made in an SEIS-qualifying company held at the time of death is exempt from inheritance tax after it has been held for two years
Are seed enterprise investment schemes exempt from IHT?
Yes, SEIS investments are exempt from inheritance tax (IHT), as long as the shares are held, and have been held for at least two years, at the time of death
UK tax payers should note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. To learn more about how SEIS or EIS works, please read the online HMRC guidance or contact a professional tax advisor.