What is SEIS?

SEIS can help you secure investment by offering irresistible tax incentives to investors. Interested? Keep reading!

Contents

• What is the Seed Enterprise Investment Scheme (SEIS)?

• SEIS: How does it work?

• SEIS funding limits

• SEIS tax relief for investors

  • Income tax relief

  • Capital gains tax relief

  • Loss relief

  • Reinvestment relief

• SEIS eligibility criteria

  • For companies

  • For investors

• Spending SEIS funds

• SEIS vs EIS: What's the difference?

• How to get SEIS funding

• What's SEIS advance assurance?

• Get investment-ready

• FAQs

What is the Seed Enterprise Investment Scheme (SEIS)?

SEIS is a government-backed initiative designed to help early-stage UK businesses attract investment. By offering generous tax reliefs, SEIS makes investing in startups less risky and more rewarding for investors.

It's the little sister to the Enterprise Investment Scheme (EIS) which is best suited to businesses which are a bit further along.

Launched in 2012, SEIS has already helped over 15,000 businesses secure essential funding. It’s a game-changer for startups, encouraging innovation and growth by connecting them with investors eager to support new ideas.

With continued growth in SEIS investments, particularly in tech and sustainable industries, the scheme has become a core part of the UK’s entrepreneurial ecosystem. And with secondary markets growing in popularity, SEIS investors could see returns sooner.

SEIS: How does it work?

SEIS offers tax incentives to individuals who invest in qualifying startups. In exchange, startups can raise up to a set funding limit, giving them the financial boost they need to grow.

Recent updates to the scheme include increased investment caps and refined eligibility rules. These changes are designed to widen access to funding while protecting investors from undue risk.

SEIS funding limits

Of course, what you really want to know is how much money you could raise with SEIS!

Under SEIS, startups can raise up to £250,000. This is a lifetime limit and businesses must secure these funds within a three-year window. Meanwhile, investors can spread up to £200,000 per tax year across several SEIS-qualified companies.

These limits help ensure that SEIS focuses on early-stage ventures, giving startups a fighting chance to develop their products, test the market, and scale up.

SEIS tax relief for investors

• Income tax relief: Investors can claim 50% of their investment (up to £200,000 per year) as a deduction on their income tax bill.

• Capital gains tax relief: Any gains made on SEIS shares are exempt from CGT, provided the investor held the shares for at least three years.

• Loss relief: If the investment doesn’t pan out, investors can offset the loss against other income or gains.

• CGT reinvestment relief: Gains from other assets can be deferred if reinvested into SEIS-eligible companies (this is subject to a cap of £100k pa.).
  

You can see why investors love schemes like SEIS! These benefits are designed to reduce the financial risk of investing in startups and encourage more private capital to flow into new ventures.

SEIS eligibility criteria

While MANY do, not every business qualifies for SEIS. There are restrictions for investors too, but let's start with companies.

To qualify for SEIS, businesses must:

• Be less than three years old.
• Have fewer than 25 full-time employees.
• Have a permanent establishment in the UK.
• Not be controlled by another company.
• Carry out a qualifying trade (see paragraph below).
• Not control a company/subsidiary that isn't a qualifying trade. 
• Not be trading on a public stock exchange.
• Not received Venture Capital Trust (VCT) or EIS funding previously.
• And gross assets cannot exceed £350,000.

Qualifying trades:

SEIS covers most industries, but there are exceptions. Trades like banking, insurance, property development, and legal services don’t qualify. See the full list. But even then, it only matters if it accounts for more than 20% of the business' activities.

As for investors:

• They must be a UK taxpayer.
• Investors can’t be employees but can serve as directors.
• Nor can investors have a substantial interest (own more than 30% of the company’s shares or voting rights) before the SEIS investment is made.
• Certain family members of directors or owners are excluded from investing. Disqualified relationships include spouses, civil partners, parents, children, and grandchildren. However, siblings, cousins, and friends are allowed to invest. 

Falling foul of these rules could lead to losing tax reliefs and other penalties, which nobody wants.

What SEIS funds can be spent on

There are rules for spending the cash raised through SEIS funding. You must spend the money you raise through SEIS within three years and only on things used to grow your business. For example, you could use the funds for:

• Product development
• Research and development
• Marketing and sales
• Hiring staff
• Purchasing essential equipment

What you can't do is use the funds to get your startup out of trouble, i.e. pay off debts. Neither can the funds be used to acquire another business. So, to stay in your investor's and HMRC's good books, be mindful of your spending.

SEIS vs EIS: What’s the difference?

Put simply, SEIS is for very early-stage startups and EIS is for more established businesses.

SEIS offers a higher rate of tax relief (50%) and is available to companies that are up to three years old (as of April 2023).

EIS, on the other hand, can be used by companies up to seven years old from the date of their first commercial sale, and while the tax relief rate is lower (30%), it applies to raises of up to £5 million per year, with a lifetime limit of £12 million.

If your startup is eligible, there's no reason why you couldn't use both schemes. In fact, this can make your company even more attractive to investors.

But just so you're aware, SEIS has to come first. Companies can't take on EIS funding and then SEIS funding after as it's against the rules.

How to get SEIS funding

Applying for SEIS funding involves more than just ticking boxes. Here's a breakdown of the five key steps:

1. Check your eligibility: Make sure your business meets the SEIS criteria. Being clear about your eligibility can save time and reduce the chance of your application being rejected.

2. Have a potential investor ready: HMRC expects that businesses applying for advance assurance can demonstrate some degree of potential investor interest. This shows that the application is not purely speculative.

3. Prepare strong documentation: Create a detailed business plan, financial projections, and supporting evidence. Investors and HMRC will want to see that you have a well-thought-out strategy for growth.

4. Apply for advance assurance: This pre-approval from HMRC reassures investors that your company is likely to qualify for SEIS. While not mandatory, advance assurance can give you a competitive edge. 

5. Issue SEIS shares: Once you’ve secured funding, submit the necessary forms, like the SEIS compliance statement, to HMRC. You can apply for advance assurance, issue SEIS shares to investors and tick off all SEIS admin on Vestd!

What is SEIS advance assurance?

SEIS advance assurance is a formal confirmation from HMRC that your business is likely to qualify for SEIS. While not essential, it helps speed up the process and gives investors the confidence that they'll benefit from the scheme's brilliant tax benefits.

Applications can take a few weeks to process, so it’s best to start early. Vestd's founder-friendly workflow will take you through it step-by-step.

Get investment-ready with Vestd

If you're gearing up for investment, SEIS is a no-brainer. Secure the cash injection your startup needs, and in return, give investors generous tax breaks when they buy your shares. It's a win-win!

Apply for advance assurance and manage your entire funding round with InVestd Raise. With a wealth of tools at your fingertips plus templates and expert support, we've simplified fundraising for good.

Talk to our team today

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Information correct at the time of publishing. Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'