Martin Sherwood: The Do’s and Don’ts of Investing in SEIS

  • On November 5, 2018
  • By GrowthInvest Admin

The tax benefits of the SEIS are very attractive but there are good reasons for that, writes Martin Sherwood as he runs through some of the pitfalls advisers and clients need to avoid

Martin Sherwood is founding partner of Enterprise Investment Partners and also featured on The GrowthInvest Adviser Hour, Episode 3 of Series 2. Click here to register/login and to watch

If you are considering the Seed Enterprise Investment Scheme (SEIS) for clients this year, here are a few tips to bear in mind. The tax benefits of the SEIS are very attractive but there are a few pitfalls you need to avoid.

The SEIS market is still very young, having only really got going towards the end of the 2012/13 tax year.. This means there have been hardly any exits to date, and none of the few SEIS managers in the market so far have a clearly defined track record.

Having said that, they may have made some investments four or five years ago that have not yet exited but are currently valued at large multiples to cost, based on the most recent price at which shares have been issued.

So what are the pitfalls? One fairly common pitfall is companies that, by mistake, issue Enterprise Investment Scheme (EIS) shares before they have finished issuing SEIS shares. This is referred to as ‘misfiling’.

It is important to understand that once shares have been issued and EIS relief applied for, you cannot subsequently apply for SEIS. If, for example, a company is raising £500,000 via a combination of SEIS shares (up to £150,000) and EIS shares (the balance of £350,000), it must finish issuing the SEIS shares before it moves on to issuing the EIS shares. The two classes of shares should be issued on different days to avoid any argument with HMRC.

Many people are attracted to the SEIS primarily on account of its ability to write off part or all of a capital gain. It is essential, however, that the investor also claims income tax relief, as the capital gains tax (CGT) relief will not be available unless income tax relief has been triggered.

Similarly, SEIS loss relief will not be available. This situation sometimes artheses with retired people who no longer have much income but dispose of an asset (a second property for instance) and are looking for ways of mitigating the CGT. When discussing a potential SEIS investment for someone with a capital gain, I am always careful to point this out.

Spreading investment under SEIS
Many investors will be investing in SEIS funds rather than single company offers, which is definitely the right approach as the risk is spread over a number of investments. These funds are almost always structured as discretionary portfolios, with the manager picking the companies and making the investments over a period of several months.

This means you obtain a separate tax certificate for each of the investments. It is quite a fiddly business keeping track of all the forms – especially as they likely to arrive on different dates spread over several months.

By law, you cannot claim your SEIS relief until you are in possession of the tax certificates – known technically as SEIS 3 forms. It is still a paper driven system. HMRC announced some time ago that it was proposing digitalising the system but so far it has not done so – indeed, some people think HMRC is having second thoughts about whether to digitalise, because of potential fraud.

So we are stuck with the paper system for the foreseeable future. Of course, not feeling up to dealing with the plethora of forms is why some clients will leave it to a professional to take care of things on their behalf.

The Seed Enterprise Investment Scheme does offer a very generous cocktail of tax benefits, which are skewed in favour of the investor in order to compensate for the risk of investment in a seed company. That said, if the investments make gains, the gains are free of tax. And if some of the investments make a loss, the client can claim loss relief, but this is not off-settable against their gains.

For the full article please read here
Source: Professional Adviser

GET IN TOUCH!

  MAIL US
enquiries@growthinvest.com

  CALL US
020 7071 3945

FOLLOW US ON


Throughout our site you will find links to external websites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers.