Finding tomorrow’s stars with the SEIS
The SEIS is a risky but highly tax-efficient way to invest in small companies. David Prosser explains how it works.
The SEIS is a risky but highly tax-efficient way to invest in small companies.
Many UK investors are still in the dark about the Seed Enterprise Investment Scheme (SEIS), even though the EU has deemed it the bloc's best national example of a tax-incentivised initiative to support small growing businesses.
The key point about the SEIS is that it is designed to encourage funding of very small and early-stage firms, which makes the scheme far riskier than other equity-based investments. To qualify for the SEIS, a company must have been trading for no more than two years and have fewer than 25 employees. Examples of SEIS businesses include film production and e-commerce companies.
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Investing at half the cost
However, for investors prepared to take that risk, and who have already made use of other, less risky tax-planning opportunities, such as pensions, individual savings accounts and venture-capital trusts, there are some very generous reliefs available. All investments, up to a maximum of £100,000 each tax year, are entitled to 50% upfront income-tax relief. The maximum £100,000 investment will cost you only £50,000.
Any profit you make when you dispose of your SEIS holding after three years is also free from capital-gains tax (CGT), normally payable at 20% for higher-rate taxpayers on profits above their annual capital-gains allowance, which is £11,700 for 2018-19.
If, on the other hand, your SEIS investment loses value, you are entitled to set your losses against your income-tax bill in the year that they occur. You can't claim loss relief on the 50% of your investment effectively paid for with upfront tax relief, but this is still very valuable. On a £100,000 investment, it would mean getting back up to £22,500 via your income-tax bill if the business went bust.So the SEIS allows unlimited tax-free profits for successful investments, but substantially limits losses if things go wrong.
It's possible to claim further tax benefits. If you've made a profit on another investment and you owe CGT on it, you can invest this cash in the SEIS and benefit from up to 50% CGT relief. And while the SEIS doesn't offer specific inheritance-tax benefits, most qualifying businesses are also eligible for business relief. Such assets don't count towards the value of your estate as long as you've owned them for two years by the time you die. The SEIS is a remarkably generous scheme for those able to tolerate risk.
How to start investing in the SEIS
Some SEIS investors choose to make one-off investments in individual businesses qualifying for the scheme; in some cases they know the business in question. Many companies raising cash on equity-based crowdfunding platforms such as Seedrs, Crowdcube and Syndicate Room qualify for the SEIS, so this can be a good route into the market. Seedrs currently has three SEIS companies on its platform, including an on-demand grocery delivery.
Alternatively, investors may prefer to approach the SEIS with the help of professional managers, through a portfolio service or even a collective fund. The website of the Enterprise Investment Scheme Association carries details of around half a dozen providers.
The managed approach has obvious appeal for investors worried about the risk profile, with funds and portfolio managers offering high standards of due diligence. Still, there will be more fees to pay if you take this option, and there is of course still no guarantee of a positive return.
Tax tip of the week
Until 21 November 2017, if a divorced person or ex-civil partner was required by court order to retain an interest in a former home, this would have counted against them when buying another property, and they would have had to pay the higher rate due on the purchase of the additional property. However, as of 22 November 2017, it has been possible to avoid this if certain conditions apply.
A "major interest" in a property is now ignored for higher-rate purposes where: the property is not a purchaser's only or main residence; the property is another person's only or main residence; and the property is subject to a "property adjustment order" in favour of the other person. The property adjustment order condition is that the major interest must be the subject of a relevant court order, a list of which can be found in HMRC's stamp-duty land-tax manual.
How to avoid the spreading IHT net
Families are now paying more than £5bn a year in inheritance tax (IHT), with the number of estates on which the tax is payable almost doubling since 2011, according to figures published this month by the Treasury.
Soaring property prices have left one in 20 families facing a potential liability for a tax that was once only an issue for the very wealthy. New reliefs that exempt more of the value of your main home from IHT are currently being phased in under Chancellor Philip Hammond (pictured). But while this will give at least some help to many families, the soaring IHT take underlines why it has become so important to plan carefully for this levy when you're saving and when you're drawing on assets later in life.
Crucially, savings held in tax-efficient individual savings accounts (Isas) count towards the value of your estate for IHT purposes. However, money in your private pensions, whether personal or occupational, does not. It therefore makes sense for many people planning for retirement to maximise their pension savings ahead of using their Isa allowances. And if you're withdrawing money from your savings, think about running down your Isas before using pension cash.
With pension savings, the full value of your fund can usually be passed to your heirs free of all tax if you die before age 75. If you die after 75, there is still no IHT to pay, but your heirs will pay income tax as they withdraw income or money as a lump sum.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
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