SEIS – Make an Investment with No Tax on Gains & make HMRC pickup 50% of the Cost
Yes you have read it right. SEIS is a perfectly legal investment scheme by UK Government, where you pay no capital gain tax on potentially unlimited gains, and HMRC pays you back 50% of your cost (in the form of reduction in your income tax payable for current year or next 5 years.)
Further if you have taxable capital gains during the year(say you have sold some shares or your second home with large gain) and use this money to make the investment you can get 50% of your capital gains tax back as well!.
And that’s not all if your investment ends in a loss you can write it off against your income reducing your income tax payable in the year of loss.
Here comes the fine print
There is a catch though( I bet you were waiting for it). The investment must be in a business which is less than 2 years old and the Company must not be connected to you and you must hold shares for at least 3 years.
Basically you are investing in Start-ups which by their very nature are high risk investments.
Remember most start-ups fail within first 3 years and generally investors don’t get any thing back. Offcourse some are sucessfull and make spectacular gains. Think about the guy who painted the facebook offices walls in return for shares and made cool $200 million.
Let’s talk Numbers
If this has your head spinning lets take an example. Say you invest in 3 different companies under SEIS and end up with 3 different outcomes: (1) You make your money back (Money back scenario), (2) You make a big loss (Lost my shirt scenario) (3) You make huge gains (Facebook scenario):
Effectively your ” Lost your shirt” scenario” turns into” Lost your socks scenario” under SEIS scheme!
I think SEIS scheme is quite cool because of the way in which it encourages start-ups in a market based way. In Ireland by contrast Government has setup a fund which invests in Start-ups. This particular fund therefore decides where the public money should be spent.
Under SEIS however crowds or individual investors decides which Start-up gets funded. They have to put in enough of their own money so that they do care about where they are investing. With SEIS public money gets put to public use in the way the public wants!
With SEIS you really only invest 50% of what you actually invest and if your investment turns out to be a Dud you only loose 30% of your money. If you make gains you don’t pay any tax on them at all!
There are also some other criteria to fulfill to quality as investor or raise funds as investee. You can read about it here.
The HMRC lets businesses know whether or not they meet this criteria. You should therefore check with the concerned business whether they have or are are in the process of getting this approval before investing.
Do you think you will be investing under SEIS?