When investors or advisers talk about Seed Enterprise Investment Schemes (SEIS) they are referring to very small, young companies indeed.
Among the criteria for a company to be considered in a Seed EIS is that it has fewer than 25 employees and has been trading for less than two years.
These are often known as start-ups or early stage companies, so naturally the risk for the investor is higher than with those businesses which have been established for longer.
For this reason, the tax reliefs on SEIS are very attractive but it is wise to always seek advice before dipping a toe into this form of investment scheme.
The income tax relief available on the amount invested stands at 30 per cent for EIS and 50 per cent for SEIS, as long as the investor pays an equivalent amount of income tax in the same tax year, Mary Tierney, tax director at Bennett Brooks explains.
The main differences between EIS and SEIS are illustrated in the infographic below.
Figure 1: The benefits for individuals of investing through EIS and SEIS
Source: The EIS Association
Ms Tierney notes: “The SEIS reinvestment rules are slightly different, allowing a permanent capital gains exemption for 50 per cent of the investment. Chargeable gains made in the three years before and 12 months after the investment are eligible for reinvestment relief.
“The exemption is dis-applied if the SEIS shares are sold or transferred within three years of issue, or the investor (or their associate) receives value from the SEIS company during the period 12 months before and three years after the issue of the SEIS shares.”
As Bruce Macfarlane, managing partner at MMC Ventures, says: “It’s probably a very good way of encouraging investors to think about risk and get involved in start-up companies.
“Clearly, the tax scheme makes it much more palatable because, particularly with SEIS, you have to assume a very high failure rate.”
So how does it work?
Mark Brownridge, director general of the EIS Association, explains: “Seed EIS and Social Investment Tax Relief-qualifying (SITR) investments can be accessed in the same way as EIS - through funds, portfolio services and on a single investment basis.
“Some EIS fund providers also manage Seed EIS and SITR funds. There are also dedicated Seed EIS and SITR specialist providers.”
He points to an interesting feature of SITR investments which is that it can be structured as a loan or equity, whereas EIS and Seed EIS is equity only.
“SITR equity investments provide the same tax reliefs as EIS, though loan arrangements only provide loss relief against capital, not income, and do not provide IHT exemption,” he adds.
Clients may be unfamiliar with Seed EIS and SITR, but this is no surprise. Some in the industry believe there has not been enough promotion of these vehicles, perhaps because they are so niche, while others suggest perhaps it is not as useful as other forms of tax efficient investment.