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What Is The Seed Enterprise Investment Scheme (SEIS)? Everything You Need To Know

The Seed Enterprise Investment Scheme (SEIS) is a government-backed initiative designed to support both startups and investors. It offers new businesses a chance to secure early-stage funding while providing investors with significant tax incentives. 

If you’re an entrepreneur looking to launch your startup or an investor interested in high-potential opportunities, you might have already heard about it.

But what exactly is SEIS, and why is it such a hot topic?

In this blog, we’ll break down SEIS in simple terms, exploring how it works, who can benefit, and the many ways it makes starting or investing in a business more rewarding. 

Whether you’re considering raising funds for your startup or thinking about investing in high-potential companies, this guide will give you everything you need to know about SEIS.

What is SEIS?

As we’ve already explained, the Seed Enterprise Investment Scheme (SEIS) is a UK government initiative designed to encourage investment in early-stage, high-risk businesses by offering attractive tax reliefs to investors. 

Launched in 2012, SEIS aims to help startups and small businesses secure the capital they need during their crucial early stages, which can often be the most challenging time for a company to attract funding.

 In the tax year 2022 to 2023, up to 1,815 companies raised £157 million through SEIS funding. And now, in the 2024 Budget, the UK government has announced that the SEIS is here to stay, extending it for a further 10 years to April 2035. 

This scheme allows eligible businesses to raise up to £250,000 in investment from individuals. In return for their investment, these individuals receive shares in the company and can benefit from several generous tax reliefs. 

What companies are eligible for SEIS?

A company might qualify for SEIS if it meets the following criteria:

– Registered and operating in the UK.

– Has been trading for less than three years.

– Not listed on a public stock exchange.

– Employs fewer than 25 full-time staff.

– Has gross assets valued at less than £350,000.

– Has not previously raised funds through EIS.

– Has not received investment from a Venture Capital Trust (VCT).

– Does not control another business that isn’t a qualifying subsidiary.

– Is not, and has never been, controlled by another company. 

How much money can a startup raise with SEIS?

Under the Seed Enterprise Investment Scheme (SEIS), a startup can raise up to £250,000 in total funding. This cap applies to the combined amount of SEIS investments that the company can receive over its lifetime.

It’s also worth noting that the company must use the SEIS funds for a qualifying business activity within three years from the date of the investment. Qualifying activities generally include activities like research and development, product development, and other operations aimed at growing the business.

How much money can you invest with SEIS?

With the Seed Enterprise Investment Scheme (SEIS), an individual investor can invest up to £100,000 per tax year. This means you can put money into one or multiple SEIS-eligible startups, as long as the total amount you invest in a given tax year doesn’t exceed £100,000.

What are the tax benefits for investors?

If you’ve noticed, one recurring theme when it comes to discussions around SEIS is the tax benefits available to investors (we’ve mentioned it three times already in this blog!). But what do these benefits look like?

a. 50% Income Tax Relief:  

When you invest in SEIS-eligible companies, you can claim 50% of the amount you invest back as a reduction in your income tax. For example, if you invest £10,000, you can reduce your income tax bill by £5,000. This applies even if you aren’t in the highest tax bracket.

b. No Capital Gains Tax (CGT) on Profits:  

If you hold your SEIS shares for at least three years, any profits you make when selling those shares are exempt from Capital Gains Tax. This means that if the company grows and your investment becomes more valuable, you won’t pay tax on those gains.

This exemption is even more beneficial now that capital gains tax rates have increased, as announced in the Autumn Budget 2024. With higher taxes on profits from selling assets, the SEIS capital gains tax exemption allows investors to avoid these additional costs entirely on their SEIS returns.

N.B. And this is very important to remember: You must keep/hold your shares for at least three years to receive these tax benefits.

c. Capital Gains Reinvestment Relief:  

 SEIS also offers 50% Capital Gains Reinvestment Relief. If you have a capital gain from selling another asset (such as property or stocks) and reinvest that gain into SEIS shares, you can claim relief on half of that gain. This can help you save money on your tax bill while supporting new businesses.

d. Loss Relief:  

If the company you’ve invested in doesn’t succeed, you can claim Loss Relief. This allows you to offset your loss against either your income tax or capital gains tax. For example, if you invested £10,000 and the company failed, you could claim relief on the £5,000 you didn’t get back (after accounting for the 50% income tax relief). This can significantly reduce the financial risk of investing in startups.

E. IHT Relief

Additionally, SEIS shares are 100% exempt from inheritance tax (IHT) if held for at least two years.

What is SEIS advance assurance?

Advance Assurance is yet another term that often crops up in discussions around SEIS and EIS. Put simply, it’s a way for startups to get confirmation from HM Revenue & Customs (HMRC) that they are likely to qualify for SEIS. It’s like getting a green light before raising investment, giving both the company and potential investors confidence that the investment will be eligible for SEIS tax relief.

Here’s how it works:

What it means for startups:  

Startups can apply to HMRC for advance assurance before they start raising funds. HMRC will review the company’s application, which includes information about the business and its activities. If HMRC agrees that the company meets the SEIS requirements, they will issue an advance assurance letter. This letter helps to reassure potential investors that their investment should qualify for SEIS tax relief.

Why it’s important for investors:  

Investors want to know that they’ll be able to claim the SEIS tax relief before they commit their money. With advance assurance, investors have more confidence that they won’t run into any surprises later. It can make a big difference in convincing investors to support a young company, especially at an early stage when risk is higher.

It’s important to note that SEIS advance assurance is not legally binding. HMRC can still refuse SEIS status later if the company’s situation changes or if they find new information. However, having advance assurance significantly improves the company’s chances of meeting the criteria when it’s time for investors to claim their tax relief.

Who could consider investing in SEIS?

Investing in SEIS can be a good choice for:

– Individuals seeking tax benefits

– Investors seeking high-growth opportunities

– Angel investors and portfolio diversifiers

– Supporters of UK startups

While SEIS has many benefits, it’s best suited for investors who understand the risks of investing in very young businesses.

What are the key risks?

When you’re eyeing SEIS opportunities, it’s easy to get caught up in the potential for big returns. But let’s not forget – early-stage investing comes with its own set of risks (some of them bigger than others). So, before you dive in, here are some of the key risks to keep in mind.

a. High risk of failure 

SEIS investments are typically in very early-stage companies. Many of these startups are still developing their products or finding their place in the market, so there’s a higher chance they might not succeed. If a company fails, you could lose some or all of your investment.

b. Illiquidity

SEIS investments aren’t easily sold or traded. You need to hold your shares for at least three years to keep the tax reliefs, but it could take much longer to see a return or exit your investment. This means SEIS is less suitable if you might need quick access to your money.

c. Valuation challenges 

Early-stage companies can be hard to value accurately. There’s a risk that you might invest at a higher valuation than the company is worth, which can impact your returns if the company doesn’t grow as expected.

d. Potential tax changes 

SEIS depends on current UK tax laws, which could change in the future. If the government adjusts the rules around SEIS, it could affect the tax benefits you receive, even after you’ve invested.

e. Dilution of shares  

If the company raises more money later on, your percentage ownership could be diluted, meaning you might own a smaller share of the company than when you first invested.

SEIS can offer great opportunities, but it’s important to weigh these risks and consider if they align with your financial goals. Speaking with a financial advisor can help you make an informed decision.

The bottom line

If you’re thinking of investing in UK startups, SEIS is a great way to support early-stage businesses while benefiting from valuable tax reliefs. Understanding how SEIS compares to other investment options, such as EIS and VCTs, can also help you make the right decision based on your goals and risk appetite.

Interested in learning more about our S/EIS AI Growth Fund, which focuses on UK-based AI-enabled and AI-first companies? Click here.

Tags: AI investments, Funding, Investors, SEIS