Actual net cash outlay 50 pence in the £1
If an SEIS qualifying investment is held for at least three years from the date of issue of the shares, an individual (who holds no more than a 30% interest in the company) can reduce their income tax liability by up to 50% of the amount invested. There is no minimum subscription and the maximum investment in SEIS qualifying companies which qualify for SEIS Income Tax Relief is £100,000 in the current tax year. Income Tax Relief is offset in the appropriate year of claim, up to a maximum of the income tax liability. In other words, initial income tax relief could reduce your tax bill to nil.
Individuals may elect to treat their subscription for SEIS shares as if made in the previous tax year, up to their maximum annual SEIS allowance, thereby effectively carrying income tax relief back one year. This assists an investor to maximise the relief available. Thus an investor who had made no SEIS investment in a tax year may make SEIS subscriptions of up to £200,000 in the following tax year and elect to carry back £100,000 to the previous tax year to claim income tax relief for that year.
Spouses each have their own investment limit (although they will be aggregated together for the purposes of the 30% test referred to above).
This relief is usually passed to the Investor in the form of a tax rebate or, if requested of HMRC, via an adjustment in their PAYE code. The relief may only be claimed once the investor has received form SEIS 3 from the company.
| Initial Investment | £ 10,000 |
|---|---|
| Less Income Tax Relief @ 50% | (£5,000) |
| Net Cost of Investment | £5,000 |
No Capital Gains Tax to pay
No Capital Gains Tax (CGT) is payable on disposal of shares held for three years, provided the SEIS initial income tax relief was given and not withdrawn on those shares
| Initial Investment | £ 10,000 |
|---|---|
| Less Income Tax Relief @ 50% | (£5,000) |
| Net Cash Outlay for Investment | £5,000 |
| Realised value of investment after 3 years (for illustration purposes) |
£16,000 |
| Total Return | £11,000 |
| Tax free profit being gain of £6,000 and income tax relief of £5,000 | |
Potential exemption of 50% of an existing CGT bill
If an asset is sold and all or part of the amount of the gain is reinvested in SEIS qualifying shares, half of the amount reinvested may be exempted from Capital Gains Tax. To receive this relief you must subscribe for SEIS shares during the tax year in which the gain is made (or in the following tax year if the investor elects to carry back the investment to the previous tax year). Relief is limited to the annual SEIS investment limit for each year (£100,000). Investors must not hold more than a 30% interest in an SEIS company
There are various circumstances in which a gain exempt by the reinvestment can become chargeable again within three years of the SEIS investment and individuals should seek advice about the events which would trigger the withdrawal of relief.
In the example that follows, it is assumed the investor is liable to capital gains tax (CGT) at the rate of 28%; some gains have a lower rate of capital gains tax.
£10,000 capital gain in 2015/16 reinvested
| Initial Investment in SEIS shares | £10,000 May 2015 |
|---|---|
| Less Income Tax Relief @ 30% | (£5,000) |
| Capital Gains Reinvestment 50% x £10,000 (assuming CGT at 28%) |
(1,400) |
| Net cash outlay for Investment | £3,600 |
Maximum exposure of 27.5 pence in the £1 for a 45% taxt payer
Relief is available for SEIS shares which are disposed of at any time at a loss (after taking into account SEIS income tax relief which is retained). The loss can be set against the investor’s capital gains, or his/her income in the year of disposal or the previous tax year. For losses offset against income, the net effect is to limit the investment exposure to as much as 27.5p in the £1, assuming the investor has a 45% marginal rate of income tax, if the shares become totally worthless. Alternatively the losses can be relieved against capital gains at a rate of up to 28% for higher rate tax payers and 18% for standard rate tax payers
| Initial Investment | (£10,000) |
|---|---|
| Less income tax relief @ 50% | (£5,000) |
| Net Cash Outlay for Investment | £5,000 |
| If investment fell to £0 net loss | (£5,000) in 2014/15 |
| Loss relief against income at 45% | £2,250 |
| Net loss | (£2,750) |
| Percentage of original outlay | 27.5% |
If the loss is offset against capital gains tax, this can be claimed against capital gains of the same year, or carried forward and relieved against future capital gains. The current rate of capital gains tax is 28% for higher rate tax payers and 18% for standard rate tax payers.
| Initial Investment | £10,000 |
|---|---|
| Less Income Tax Relief @ 50% | £5,000 |
| Net Cash Outlay for Investment | £5,000 |
| * If investment fell to £0 net loss relief at 28% | (£1,400) |
| Less Income Tax Relief @ 30% | (£30,000) |
| Net loss | (£3,600) |
| Percentage of original outlay | 36.00% |
*Assumes sufficient gains against which to offset the loss.
Thus an individual who has income which is charged to income tax at higher rates is likely to wish to offset the loss against income rather than capital gain.
Where deferral relief only is claimed, loss relief against income may be limited by the cap on income tax reliefs. The loss relief, when aggregated with all other specified income tax reliefs, is limited to a maximum of £50,000 or, if greater, 25% of the taxpayer’s “adjusted total income” for the tax year
Professional advice should be sought.
Potential 40 pence in the £1 saving
Shares in SEIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax purposes. Relief can be at rates of up to 100% after two years of holding such investment, so that any liability for Inheritance Tax is reduced or eliminated in respect of such shares.
| Initial Investment | Holding of cash | EIS investment |
|---|---|---|
| Less income tax relief @ 50% | £10,000 | |
| SEIS investment | £10,000 | |
| Less income tax relief @ 50% | (£5,000) | |
| Net Cash Outlay for Investment | £5,000 | |
| Hypothetical value of cash | £10,000 | £5,000 |
| * Hypothetical value of SEIS | £16,000 | |
| IHT on cash balance @ 40% | (£4,200) | (£2,000) |
| Value of estate | £6,300 | £19,000 |
The table compares an SEIS investment of £10,000 and the holding of cash of £10,000. It assumes that the investor’s inheritance tax nil rate band is already fully used
IHT Relief above assumes the investment has been held for more than two years and is worth £16,000 at the date of death. IHT relief would be obtained at up to 40% of the value. Over the same period, the cash balance increases to £10,500.
There is no claw back of the income tax relief or deferral relief on death. Thus in this example, £16,000 of value passes to beneficiaries free of inheritance tax and the estate is also augmented by income tax and capital gains tax saved (there is of course no CGT on death anyway) by the deceased in this example
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