The amount that companies raised under the seed enterprise investment scheme (SEIS) increased by over 50% to £242 million for 2023/24, with the number of investors also increasing by nearly 2,000 to just over 10,000. The SEIS offers attractive tax advantages to the more experienced investor prepared to take the risk of investing in smaller, start-up companies.

The company’s perspective

Under the SEIS, start-ups can secure £250,000 of share capital funding to help them grow. There are numerous conditions the company must meet, including that they have:

• been trading for less than three years (it doesn’t matter when the company was actually incorporated) and carrying on a genuine new trade;
• gross assets of £350,000 or less; and
• fewer than 25 full-time equivalent employees.

Employees cannot invest in their employer company, but directors might be able to do so. Directors cannot have a substantial interest in their employer company. Very basically, this means not having a shareholding of more than 30%, but – since shareholdings of close relatives are included – it’s unlikely that directors of a family-owned company will qualify.

A number of trades are excluded, but there is still plenty of scope for investment. Music and production companies have been popular, as well as app development.

It’s very important that investors appreciate the high risk of a SEIS investment. Although the tax reliefs are attractive, they will not be sufficient compensation if the SEIS company fails completely.

The investor’s perspective

The annual investment limit for investors is £200,000, although half of investors claiming relief only invest £10,000 or less. The risk can be mitigated somewhat by investing through a fund or portfolio.

• For most taxpayers, the main attraction of SEIS investment is the 50% income tax relief. This means that for an investment of £10,000, the investor’s tax liability is reduced by £5,000. Should the current year’s tax liability be insufficient, some (or even all) of the relief can be carried back to the previous tax year.
• The ability to carry back relief means an investment made by 5 April 2026 can be used to reduce the investor’s tax liability for 2024/25.

Another advantage for some investors is that 50% of the SEIS investment can be set against chargeable gains made during the tax year, saving capital gains tax (CGT). Given a CGT higher rate of 24%, this means potentially another 12% of tax relief, making 62% of relief in total.

Exit strategy

Even if things go well, the exit date might be set ten years in the future. The plan could then be for the company to be sold or subject to a management buy-out. Remember, there is no recognised market for SEIS shares. However, there is the potential for tax-free growth as the disposal will not be subject to CGT.

Many small companies don’t succeed, so there is a good chance a SEIS investment will become worthless. If this happens, the resulting capital loss (reduced by the 50% income tax relief) can be deducted when calculating the investor’s taxable income. For a higher-rate taxpayer, this will mean another 20% in relief, or 22.5% for someone paying the additional rate. So, in theory, the maximum net loss can be less than a fifth of the amount invested.

Please talk to us about SEIS schemes for your business.