20 November, 2014
The Seed Enterprise Investment Scheme (SEIS) could be an interesting option for eligible companies struggling to raise capital through traditional channels such as bank loans, as it makes investment all the more appetising for the third-party investors.
Through SEIS eligible investors can invest up to £150,000 in a company (this is a lifetime limit) for a maximum stake of 30% in the company. The combination of tax reliefs offered to the potential investor under SEIS can be maxed out at a generous 78% (50% Income Tax relief and 28% Capital Gains Tax relief), additionally there is no tax on any growth in the value of the investment providing the investor holds the shares for a minimum of three years.
Simple investor example
Let’s assume investor X invests £60,000 for 30% of the company Y at a £200,000.00 valuation, and investor X pays income tax at 45% and capital gains tax at 28%. Company Y does well and sells for £500,000.00 in year three.
Investment = £60,000
Income Tax Relief = £30,000 (50% back as a tax bill reduction)
Profit from sale = £150,000.00 (30% of £500,000.00)
Capital Gains Tax = £Zero (investor X held the shares for three years)
Tax free return = £180,000.00
The main drawback compared to a bank loan is that a company will be giving up equity. However, you will not be incur any interest and there won’t be as much pressure to repay the money as investors will usually allow their equity to mature before cashing out.
Who is eligible?
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