In his March 2014 budget the Chancellor announced that the Seed Enterprise Investment Scheme would become permanent.
This is the scheme that allows companies that have been trading for less than two years and that have less than £200,000 of assets to raise up to £150,000 of capital from UK investors with a tax treatment that makes it very attractive for the investors to invest.
For their part, investors can invest up to £100,000 per tax year spread across one or more companies.
How does it work?
UK tax-paying investors get a 50p tax credit on the monies that they invest as equity in SEIS-qualifying companies, regardless of the marginal income tax rate that they pay. Investors also receive capital gains tax relief of 50% on any capital gains they use to invest in SEIS-qualifying companies: for every £1 of capital gains invested, higher rate tax-paying investors get a 14p tax credit.
In the event that an investee business fails, the investor gets a further 22.5p in the pound tax write-off.
In summary what your recovery per pound invested is:
|Tax Credit given||
|Investor not investing capital gains||
|Investor investing capital gains||
*providing the shares are held for 3 years or longer.
Plus, any capital gains made on the SEIS investments themselves are exempt from Capital Gains Tax.
While SEIS tax reliefs have only been available for investment in ordinary equity to date, the government is exploring whether similar reliefs can be extended to other investment instruments such as convertible loans.
SEIS is here to stay. Having an environment where entrepreneurs can de-risk equity investment for their early investors to such an extent is a big positive for innovation. While it means the Taxpayer will have to pick up the bill for the investments that will fail – and there will be many due to the nature of early stage investment – for those raising or investing money, the benefits are compelling.
If you want to find out more about this, contact Simon Jackson