What is (S)EIS and how does it work?

In order to encourage investment in start-ups, the UK has one of the world’s most generous tax schemes. The scheme rewards individual investors (angels) for putting their funds into a start-up through tax rebates that are claimed once you file your taxes.

The scheme is the main reason of how in January 2020, we got comfortable with using our hard earned net income, to make our first ever investment (which was in Howbout). We did this knowing that the sector traditionally does not not have big US style exits, but the investment was massively de-risked by being SEIS eligible.

The scheme itself was setup in 2012 by the UK Government and is the ‘Seed Enterprise Investment Scheme’ (SEIS) and applies to most sectors (not just tech) where it is most often used. It is a great enabler of early stage start-ups, which are not yet ready for VC money, to raise some runway from angels to build out their idea. As such, in our portfolio you will see a few non-tech investments too…

So what are the benefits for an angel, in investing in a SEIS eligible start-up:

1. Income tax relief - Up to 50% income tax relief on investments up to £200,000 per tax year.

   • i.e. If you invest £10k in a startup this year, when you file your taxes, you get £5k back!

2. Loss relief - If the startup goes bust or your shares are sold as a loss, you can set that loss against your tax.

   • i.e. for the remaining £5k you didn’t claim, if it now went bust, you could offset that £5k against your tax. As a top rate tax payer (45%) that means you would save £2.25k. So overall you only lost £2.75k of your £10k investment.

   • i.e. As a top rate tax payer, you only risk 27.5% of your investments made into SEIS companys

3. No Capital Gains - If your exit from the startup, happens 3 years after your investment, any gains are totally exempt from Capital Gains Tax (CGT)

   • i.e. pure profit after 3 years

4. No inheritance tax - If you made the investment 2 years ago and you happen to pass away, your shares can be passed onto someone else with no inheritance tax applied.

For us, reasons 1 and 2, are enough to continue wanting to risk our income and invest in UK start-ups. Reason 3 is a great bonus if we do actually make some money and reason 4, is (hopefully) still far away from our thinking!

Additionally, there is a follow-up EIS scheme that gives you 30% income tax relief and you can invest up to £2m a year with! If you look across our portoflio, all our UK investments were either SEIS or EIS eligible.

There are lots of nuances to be aware of as both a founder and investor, in terms of what firms are eligible for SEIS / EIS (no property, no lending etc), how much a company can raise using the scheme, how long after forming they can use the scheme etc… So please make sure any investment is actually eligble, before handing money over.

Note: Image generated using DeepAI with the text “A group of gentlemen discussing tax efficency”