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The Simple SEIS Guide for Startup Founders Looking For Investment

Startup owners are often on a quest to secure funding to get their venture off the ground. When approaching investors or drawing up pitches, it’s crucial to try and get into the mind of an investor and figure out exactly what is going to make them proceed with a deal, rather than turn down an opportunity. The primary aim for an investor is to see a return on the initial cash injection, and there are various assurances that make investing in certain ventures more appealing than others. In the UK, the Seed Enterprise Investment Scheme (SEIS) offers generous incentives for investors looking to back early-stage ventures. The scheme offers benefits for startups and investors, but what exactly is it, and how does it work? If you’re a new business owner looking for investment, here’s a useful guide to the SEIS.

What exactly is the SEIS?

The SEIS is an extension of the EIS, the Enterprise Investment Scheme, which was introduced in 1994. A modernised, more expansive version, the SEIS was launched in 2012. The primary aim of the scheme is to make it easier for startups to secure funding by providing tax reliefs for investors who buy equity in a fledgling business. In 2014/2015 alone, 2,185 startups raised capital worth £168 million through the SEIS.

The SEIS provides significant benefits for investors, who are able to make multiple SEIS investments within the same tax year. These benefits include:

  • 50% relief on income tax: a £50,000 investment would therefore qualify for tax relief worth £25,000.
  • 50% reinvestment relief on capital gains tax: an investor can claim 50% capital gains tax relief on other investments sold at a profit.
  • Capital gains tax relief on the investment: if the investment thrives, and the investor sells their equity for a profit, they will be able to keep all the profits, with no capital gains tax payable.
  • Loss relief: if an investor sustains losses as a result of the investment failing, they can claim the losses against their current tax bill.
  • Inheritance tax relief: if an investment is passed down in the event of the investor’s death, this will be eligible for 0% inheritance tax. The investment must have been held at the time of death and for a minimum of 2 years beforehand.

Qualifying for the SEIS

The benefits of the SEIS are clear for investors, and this makes startups that qualify for the SEIS an appealing prospect. In order to be eligible for the scheme, startups must comply with the following criteria:

  • Less than 2 years of trading: this timeframe relates to the point when equity is purchased by the investor. It’s also important to note that trading refers to any kind of business-related activity, even selling products on a stall at a village event, for example.
  • Less than £200,000 in assets and fewer than 25 employees: to qualify for the SEIS, a startup must have less than £200,000 in gross assets and fewer than 25 full -time employees (or the equivalent number of part-time staff)
  • Type of trade: most trades are eligible for the SEIS, but there are exceptions. These include financial services and property and land development ventures.

You can check viability and apply for advanced assurance by contacting HM Revenue & Customs and filling in a form. Many investors will want to clarify your SEIS status before deciding whether or not to invest. The application process usually takes up to 4 weeks, but it’s best to give yourself plenty of time, as there may be delays.

The maximum you can raise via the SEIS is £150,000. This sum should be sufficient to get a new business up and running and to demonstrate firm foundations and potential for growth if you do want to approach alternative investors or borrow more money in the future. It is possible, if you do need more cash to develop and expand further down the line, to benefit from the EIS scheme, which provides funds up to the value of £5 million. There are similar tax reliefs in place for investors, but they are not as generous as those afforded by the SEIS.

If you own a startup, and you’re looking for investors, it’s well worth finding out more about the Seed Enterprise Investment Scheme and thinking about how it could benefit you. If you can approach investors with assurances in place, your business will be a more attractive proposition, and you may find it easier to secure the funding you need. You can check eligibility criteria and apply for assurance on HMRC’s website.

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