Financing your start-up: Seed enterprise investment
In the current market, entrepreneurs need to work hard to fund start-up ventures. With bank lending remaining elusive, start-ups have been increasingly drawn to offering equity-based investments. But are you and your investors making the most of the business reliefs available?
The government's Seed Enterprise Investment Scheme (SEIS) is aimed directly at start-ups. It hopes to encourage investors to assist new business growth by offering significant tax reliefs over and above those offered under the pre-existing Enterprise Investment Scheme.
What is in it for an investor?
As we said above, tax reliefs. As we all know, making a smart investment in a successful start-up can reap significant rewards but the SEIS seeks to mitigate some of the investment risk by offering significant tax reliefs. Investors who subscribe for shares in a start-up company qualifying for the SEIS receive:
- income tax relief of 50% of the cost of the shares (maximum annual investment of £100,000 i.e. up to £50,000 tax relief)
- capital gains tax relief on any chargeable gain that is reinvested into an SEIS qualifying company (maximum investment of £100,000, i.e. up to £28,000 tax relief)
- capital gains tax relief on any gain made when the shares are sold after 3 years.
What is in it for a start-up?
One word: capital. A start-up can raise up to £150,000 under the SEIS and the funds must be used within the business.
How does a company qualify for the SEIS?
As with any HMRC scheme there are a number of requirements that the company and the investment itself must meet to enable investors to claim and keep the SEIS tax reliefs. For example, the company must have traded for less than two years, have less than 25 employees and have gross assets of no more than £200,000.
The investor must also hold the shares for at least 3 years and the investor must not, at any time until after those 3 years, hold more than 30% of the company or be an employee of the company (although they may be a director).
Not every start-up may qualify for the SEIS but those who do should be able to attract investors looking for a highly tax efficient investment opportunity.