Seed EIS (SEIS) Scheme – What you need to know
The following is to provide some clarity on what the benefits of SEIS investing are, direct investing or via a fund, approved or unapproved funds and breaking down some of the barriers in regard to what offers are available to the investor seeking tax efficient investment structures. For information about EIS funds, please see our EIS page.
If you are interested in investing in an EIS scheme, please take a look at our hybrid EIS/SEIS fund.
Tax efficient benefits for the SEIS investor
50% income tax relief
50% income tax relief may be claimed against income tax paid or payable in relation to the tax year 2014/15 on total investments up to £100,000 per investor.
Alternatively an investor can opt to treat an investment as having been made in the 2013/14 tax year, in whole or in part, such that 50% tax relief is available against income tax paid or payable for that year.
Capital gains tax exemption
Gains on sales of other assets that are realised in 2013/14 and invested in SEIS shares will qualify for a 50% exemption if a 2014/15 investment is carried back and treated as having been made in 2013/14.
Tax free capital gains
There is no capital gains tax liability on gains on the disposal of shares which have been held for at least three years in SEIS qualifying companies.
100% inheritance tax exemption
Through the availability of BPR, there may be 100% inheritance tax exemption on the death of the investor (or on certain lifetime transfers) for each individual investment that has been held for at least two years.
Loss relief (providing total tax relief of up to 86.5%, if all available income and capital gains tax reliefs are claimed). A loss on any qualifying investment in the portfolio, irrespective of the overall performance of the portfolio, can be offset by individuals against income of the tax year of the loss, or the previous year, or against capital gains of the tax year of the loss and future years.
Direct SEIS investment or investment via a fund
Direct investments are attractive if an investor is investing in a sector and type of business that s/he is fully appreciative of. However, challenges emerge:
Eggs all in one basket!
- With direct investment strategies, an investor is generally committed to a limited number of businesses and can find that they may have to provide additional support in terms of capital and time
- Through a fund an investor will benefit from the resources of the fund manager and portfolio exposure (an investment is spread over a number of businesses, perhaps in different sectors and at different stages of growth)
- The fund will generally have deeper pockets, able to provide the capital necessary to unlock the value of an investment
HMRC approved or HMRC unapproved SEIS Funds
The only difference between an ‘approved’ and an ‘unapproved’ fund is that the approved fund prospectus has been reviewed by HMRC. Provided the approved fund invests at least 90% of its assets in SEIS-compliant investments within the 12 months following fund closing, then investors in the fund will be treated as having made the SEIS investments as at the date the fund closes and not, as is the case with an unapproved fund, when the fund actually invests in the SEIS investments.
A majority of SEIS funds are actually ‘unapproved’. If the investment is made in an unapproved fund income tax relief is available following each investment by the manager. If one assumes the manager takes up to two years to invest the fund and manages the timing of investment so that the fund is deployed equally over the two years, income tax relief is available across two tax years, all of which are at 30% (as currently legislated). There is therefore greater flexibility in regard to income tax relief.
The final consideration is the fact that as 90% of the capital must be invested within 12 months in an ‘approved fund’, investors should be sure that the fund in question has identified its deal flow as private investments take a lot of due diligence and time, and the 12 month clock is ticking.
SEIS schemes – tax efficient investment with substantial downside protection
In summary, SEIS investing is a highly tax efficient vehicle for investing with substantial downside protection in the form of loss relief. It comes down to personal preference as to whether one invests directly, via a fund or both. For instance, the Mercia Growth Fund (SEIS & SEIS) series provides all investors with deal flow received by the fund manager, sight of investment papers and the opportunity to invest alongside the fund.
If a fund approach is selected (and most funds are unapproved funds for their inherent flexibility), then the option is to chose between capital growth or capital preservation and if growth, chose a sector that you believe will deliver the returns commensurate to the level of risk you are potentially undertaking as any type of SEIS investment carries no guarantee of a capital gain.
If you are interested in investing in an SEIS scheme, please take a look at our hybrid EIS/SEIS fund.
Note: Shares must be held for at least 3 years to receive most SEIS benefits summarised above and readers are directed to http://www.hmrc.gov.uk/seedeis/ for full details on SEIS investing. Your attention is drawn to the fact that this article does not constitute a personal recommendation. Mercia Fund Management Limited (MFM) is not authorised to provide specific and personal advice on the suitability of investments for a potential investor’s individual circumstances, risk tolerance or investment objectives. If you have any doubt about whether an investment in a fund such as an SEIS Fund is appropriate you should consult a suitably qualified financial adviser. MFM is authorised and regulated by the Financial Conduct Authority in the conduct of its Investment Business.