SEIS Tax Relief - Complete Guide to the Seed Enterprise Investment Scheme

We often talk on this blog about the benefits of the Seed Enterprise Investment Scheme. Today, we're going to provide a comprehensive guide on why it is such a good idea for small businesses and investors alike.

The main benefit of the SEIS scheme is to encourage investment in small, new, early-stage companies. The scheme complements the Enterprise Investment Scheme (EIS) but focuses on raising smaller amounts of seed capital for new start-ups.

What is SEIS? (SEIS Explained)

Launched on 6 April 2012 by then-Chancellor George Osborne, the Seed Enterprise Investment Scheme became permanent in 2014. It is designed specifically for small unquoted companies.

The SEIS is a government‑backed scheme designed to provide extensive Income Tax and Capital Gains Tax (CGT) breaks for UK investors. There is, of course, a significant amount of risk in early-stage investment, and the generous tax reliefs available to investors using the scheme help to partially mitigate this.

Outside of the professional investment sector, the SEIS still requires promotion to make more investors aware of its benefits. There are also many businesses that could benefit from the SEIS but remain unaware of its existence. Official guidance:

Legislation: Income Tax Act 2007, sections 257A–257HJ (SEIS rules)

Gov.uk: “Seed Enterprise Investment Scheme” (searchable on gov.uk)

SEIS Benefits: Tax Breaks for the Investor

The SEIS offers seed investors extremely generous tax reliefs—even more generous than under the EIS, reflecting the fact that seed funding is usually a higher-risk investment.

For qualifying individual investors, the main benefits are as follows:

• SEIS Income Tax Relief: Tax relief worth 50% of the amount invested on a maximum annual investment limit of £200,000 (Note: This individual investor limit was increased from £100,000 in April 2023). Relief applies even if the investor pays less tax than the investment amount (unused relief can sometimes be carried back).
• CGT Exemption: Disposals of SEIS shares are completely exempt from Capital Gains Tax once they have been held for three years, provided certain qualifying conditions are met.
• Reinvestment Relief: A 50% exemption from Capital Gains Tax on gains reinvested within the scope of the SEIS.
• Loss Relief: If the SEIS shares are ultimately sold at a loss or become worthless, loss relief can be set against the taxpayer’s income instead of capital gains—a great backstop on potential losses.
• Inheritance Tax (IHT) Relief: Investments in SEIS will normally qualify for 100% relief from Inheritance Tax after two years, assuming the usual conditions are met.
• SEIS Carry Back: You can carry back tax relief to the preceding tax year in order to maximize any unused relief.

The tax relief is given by reducing an individual’s overall tax liability, with the proviso that there is a sufficient liability against which to set it.

A Worked Example of SEIS 50% Tax Relief

These tax breaks help significantly reduce the risk for investors, even if the investment is a total failure. Let’s look at an example.

John is a 45% taxpayer and invests £100,000 in a qualifying SEIS. If the company folds and the shares have no value, tax reliefs could mean that his maximum loss is only £27,500 after claiming income tax relief and loss relief. There may be further savings if he claimed the 50% exemption from CGT for gains reinvested.

Conversely, if the investment breaks even and John sells his shares for £100,000 after three years, he will have benefited from £50,000 in income tax relief. When the shares are sold, he makes an effective profit of £50,000 with no CGT liability. If the shares had doubled in value, John could have made £150,000 tax-free.

SEIS Eligibility: Does My Company Qualify?

To ensure investors can claim and keep their tax reliefs, the issuing company must meet a strict set of SEIS company requirements. Some apply at the time of the share issue, while others must be met continuously up to the third anniversary of the issue date.

Here are the primary qualifying criteria:

• SEIS Investment Limit: As of April 2023, the maximum amount a company can raise through SEIS is £250,000 (previously the SEIS £150,000 limit). This includes any State Aid funding received prior to issuing shares.
• The SEIS Gross Assets Test: The company’s gross assets must not exceed £350,000 (increased from £200,000 in April 2023) immediately before the shares are issued. Gross assets mean all assets shown on the balance sheet without deducting liabilities. For groups, this applies to total group assets.
• SEIS Employee Limit: The company must have fewer than 25 full-time employees (or part-time equivalents) across the whole group.
• The Age Rule: The company must have been trading for less than 3 years (previously known as the SEIS 2 year rule). The definition of when a trade has officially started can be subjective so best to discuss this with an advisor.
• * Unquoted Status: The company must be unquoted at the time of issue. AIM and PLUS Markets listed companies are eligible.
• Financial Health: The company must not be in financial difficulties as governed by State aid guidelines and EU Guidelines on State aid for rescuing and restructuring non-financial undertakings in difficulty.
• No Prior EIS/VCT Funding: The company cannot have received any investment under EIS or VCT before using SEIS. (However, you can raise EIS or VCT funds after an SEIS round).
• UK Permanent Establishment: The company must be UK resident or have a permanent establishment in the UK.

Can a Foreign Company Benefit From the SEIS?

Yes. A foreign company can benefit from the scheme, which helps them raise money from the UK while giving UK taxpayers a wider range of investment options in overseas companies. The company is not required to have a UK subsidiary, but they must have a "permanent establishment" (a fixed place of business or a representative with satisfactory authority) in the UK, which essentially means a branch. The exact requirements for foreign companies are complex, so seeking advance assurance from HMRC is highly recommended.

SEIS Qualifying Trade & Excluded Activities

One of the most important SEIS company requirements is that the business must carry on a genuine, new qualifying trade. HMRC defines this as a trade conducted on a commercial basis with a view to the realization of profit.

Whilst most business activities qualify, there is a strict list of SEIS excluded activities. Your trade does not qualify if it consists wholly, or substantially (more than 20% of total activities), of the following:

• Dealing in land, commodities, or financial instruments
• Property development
• Providing legal or accountancy services
• Financial activities (banking, insurance, debt-factoring)
• Operating or managing hotels, nursing, or care homes
• Farming and market gardening
• Leasing or letting of assets on hire
• Coal and steel production
• Energy generation activities (added in April 2016)

If your business mixes permitted and excluded trades then it is possible to have up to 20% of excluded income, which you must demonstrate how that is calculated and would be ringfenced. You must put rigorous structures in place and ideally get an SEIS pre-assurance application with full disclosure.

Some types of business are also not allowed because they are considered one-off special purpose vehicles (SPV) just to incubate and sell soon after the three year investment period. This is especially true for film companies which want to develop movies but one at a time. If the application does not make clear that you are seeking funding for more than one movie with the clear intention to create a sustainable production company for the long term, rather than singular movies for sale and shut down, then HMRC will likely deny the application.

Another area of concern is when assets are still owned by the company and effectively leased to the customer as part of an installation plus service model. HMRC will consider that portion of the income as for the rental of the asset, which is not allowable.

The Risk to Capital Condition

The EIS "Risk to Capital" condition requires that companies raising funds must have a genuine, long-term intent to grow and develop their business, and that investors face a significant risk of losing more capital than they gain. This rule, introduced in 2018, aims to exclude tax-motivated, capital-preservation schemes. 

Key Aspects of the Risk to Capital Condition

• True Risk: The investment must not be structured to protect the investor’s capital. It must be reasonable to conclude that a significant risk exists that the investor could lose more money than the total net return (including tax relief).
• Growth Focus: The company must be using the funds to grow and develop its trade, evidenced by plans to increase employees, turnover, or customer base.
• Assessment Factors: HMRC reviews cases "in the round," considering factors like, but not limited to:
  • The company’s growth objectives.
  • The riskiness of the income sources.
  • The availability of assets for securing financing.
  • The extent of subcontracting to unconnected parties.
  • The marketing of the investment. 

If an investment seems too safe or focuses on capital preservation, it likely will not qualify for EIS relief, and companies will need to submit a questionnaire addressing these specific criteria when submitting their compliance statement.

Another document that HMRC will ask to see when submitting applications to them would include a detailed business plan that allows HMRC to understand what the trade is and what the main components of the business consists of. It does not have to be too in depth or complex but it should be clear and not require further explanations to an agent. They will also want to see a detailed financial forecast that explains clearly how the sums being raised will be spent in a broken down, understandable way, not just a round sum figure like £1m with no explanation why the business needs those funds.

You may also need to provide an organisational chart, an explanation of differences from any similarly named or traded entities the shareholders may have been involved in, or explanations for applications made under the follow on funding rules (but only in relation to EIS).

Follow on funding rules relate to businesses which have made their first sale more than seven years ago, the EIS date limit, but are entering a new geography or product or service area. You can also extend this investment date limit if the Period B of the last round of investment has not yet ended.

Who is a Qualifying Investor for SEIS?

SEIS rules allow some business owners to invest in their own companies, but it is important to understand the restrictions on who can and cannot invest.

The "Substantial Interest" Restriction

An investor must not have a "substantial interest" in the company. This means you cannot control the company, possess more than 30% of the issued share capital, possess more than 30% of the voting power, or be entitled to more than 30% of the assets in a winding-up.

These restrictions also apply to the investor’s "associates," which HMRC defines as:

• Business partners
• Trustees of any settlement of which the investor is a settlor or beneficiary
• Relatives (spouses, civil partners, parents, grandparents, children, and grandchildren).

However, the list of associates does not include siblings, extended family, or in-laws. This leaves an opening for new business owners to seek investment from their extended family.

Can Employees and Directors Claim SEIS?

• Employees: You cannot invest in a company if you are an employee. You are deemed to be "connected."
• Directors: Directors are allowed to invest under SEIS, provided they do not hold a substantial interest (more than 30%). If you want to be both an SEIS investor and a director, you must get the sequencing right: subscribe for the shares, receive the shares, and only then become a director. Furthermore, under SEIS, an investor cannot take a salary as an employee unless they become an investor first, then a director and then paid a reasonable salary.

How Does SEIS Work? The Application Process

At Key Business Consultants, we have helped hundreds of businesses navigate the SEIS application process over the years, securing vital tax relief and funding for start-ups.

1. Apply for Advance Assurance (highly recommended)

Before issuing shares, we highly recommend applying to HMRC for "advance assurance." While not mandatory, this is not an approval or registration or certification, once HMRC confirms that they see no problems with the way you are structuring the company and the articles and intend to operate, it proves to potential investors that their investments will benefit from the advertised tax breaks so long as all the other scheme rules are adhered to.

Since January 2018, HMRC no longer provides advance assurance on speculative applications. You must now include the names of potential investors who are ‘likely’ or currently looking to invest if assurance is granted. HMRC usually takes around 10 days to process a straightforward application by ourselves.

2. Receive the funds and issue shares

The investment must be received before the shares are issued. You will need to tell the investor to pay the funds into the company bank account and then provide that when applying for the claim forms.

Investors may prefer, and it is recommended, to provide the investors with a term sheet explaining what the investment relates to and also creating a shareholders' agreement to confirm how the business will be run. This will also show a level of professionalism that may make investors more ready to invest.

Once the sums are received then the shares need to be issued at Companies House and the official share register or register or members created. Shareholders will also want to receive a shareholders' certificate to confirm the details of their investment certified by a company director. We do all this as part of the work we do for our clients.

3. Spend the Funds Correctly (The 3-Year Rule)

Once the funds are raised, all monies must be spent within 3 years of the shares being issued. The money must be spent on a qualifying trade, preparing to carry out a qualifying trade, or R&D expected to lead to a qualifying trade.

4. Claim SEIS Relief

For SEIS you can submit a compliance statement to HMRC once the company has spent 70% of the SEIS funds or traded for four months. Once either of these have been confirmed and shares issued, the company must submit an SEIS1 form to HMRC. If successful, HMRC will provide the company with SEIS2 certificates and SEIS3 forms to give to investors, which we normally receive within ten business days.

Investors use the Unique Investment Reference (UIR) on their SEIS3 form to claim the 50% income tax relief on their self-assessment tax returns with a covering letter or also online, as best suits their situation, and the certificate is kept for your records. It is also a sensible thing to do to take a copy of the SEIS 3 form because once that is sent it may be needed in future to recall what was claimed and how.

Practical tip: for those who invest a lot it is sensible to create a spreadsheet of all the investments and details like date, UIR, company name, tax years claimed, additional reliefs like loss relief or CGT reinvestment or deferral reliefs.

What Happens After SEIS? (EIS and VCT)

In many ways, the SEIS is the smaller sister of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT). A company that has had success with SEIS will likely continue to raise investment using these larger schemes.

While SEIS provides 50% income tax relief for very early-stage risk, the EIS encourages investment in slightly larger, unquoted trading companies. EIS limits are significantly higher: companies can raise up to £5m in any 12 months (£12m lifetime limit), and individual investors can invest up to £1m per year for 30% income tax relief.

A further EIS or VCT fundraising round can take place within a short time after the SEIS investment is completed, helping businesses scale successfully.

8 Top SEIS Mistakes to Avoid

If you want to ensure a smooth SEIS raise, avoid these common pitfalls:

1. Being an employee before investing: You cannot claim relief if you are an employee. If you plan to be a director, ensure the shares are issued before you are officially appointed and only be paid via paye afterwards.
2. Receiving a benefit: You cannot have a "substantial interest" (over 30%), nor can the company lend you money via "linked loans" connected to the share issue.
3. Abusing subsidiary structures: The company attracting the investment cannot be a subsidiary of another company during the 3-year period, nor can it be set up purely to bypass SEIS rules.
4. Missing the spending deadline: You must spend the funds on a qualifying trade within 3 years of the shares being issued.
5. Submitting incorrect paperwork: Sending incomplete or incorrect paperwork to HMRC via form SEIS1 can lead to your application being rejected, potentially losing your available investment cap.
6. Receiving the funds before issuing the shares: this is imperative and will invalidate the investment if gotten wrong with tax issues to attempt to unwind it.
7. Not claiming the tax relief on your tax return: It might sound strange but some people have forgotten or thought that the tax relief was automatic and then after four years after the tax year of the investment it is too late to claim the income tax credit.
8. Think of other tax schemes: it is possible to still invest in shares not through SEIS but still get income tax loss relief, as opposed to capital loss relief, for trading companies.

If you’d like to learn more about how the SEIS scheme can help your business raise money, or if you need help securing advanced assurance, please get in touch with our expert team today to arrange a free, no-obligation meeting.