Funding new enterprises with no proven track record is akin to giving money away, which is why startup companies have always found it difficult to get funding. Investors understandably shy away from overly risky investments and tend to go for companies that are already established or at least those whose founders have a proven track record.
The government, however, has changed this when it launched the Seed Enterprise Investment Scheme (SEIS) in April of 2012. This government program made it easier for new companies with bright ideas to obtain their much-needed funding by encouraging investors to put money on start-ups in exchange for some tax breaks. Some Xero accountants share what you need to know about this investment option.
Requirements to qualify for SEIS
Only companies in the UK can qualify for SEIS funding, although not all UK companies are eligible. Take note of these requirements:
- Your company must not be quoted nor traded on any stock exchange.
- One of your company’s goals should be to gain profits, so you must be operating in a qualifying trade. If you are unsure of the type of activities you are trading in, visit the HMRC page. Generally, most trades are considered qualifying except for farming and property development, and accounting and legal services.
- You should be operating for not more than two years.
- The maximum asset value of your company must be less than £200,000.
- The number of your full-time employees must not be more than 25.
- Your company has not received more than £150,000 in funding from another source, but if you have received investment from Venture Capital Trust (VCT) or Enterprise Investment Scheme (EIS), you will no longer qualify for SEIS funding, regardless of the amount.
If you have a great business idea but are unsure of how to start due to the lack of funding, SEIS will be a huge help for you.
What’s in it for investors?
By putting up a SEIS investment, the person is given these benefits by the government:
- 50% Income tax relief: This is up to 50% of the total investment for a maximum amount of £100,000 a year. Investors need to hold the shares for three years in order to uphold the tax relief.
- 100% Inheritance tax relief: Inheritance tax is demanded when a person dies with an estate that is valued at more than £325,000. When the person has SEIS shares for two years, the total value of the shares will be counted as an Inheritance tax relief.
- Loss relief: If the startup being funded by the SEIS investment doesn’t succeed, the investor can offset the loss against tax on other sources of income.
- No capital gains tax: If the investor had held the shares for three years before selling them, there will be no capital gains tax collected on any profit made on that sale.
Take note that SEIS investors can’t be a company. Only individuals who are liable with UK income tax can invest. It’s important to know these things before you consider this option for your startup.