SEIS Changes – The Seed Enterprise Investment Scheme
Changes to the seed enterprise investment scheme (SEIS) are due to take effect from April 2023.
If yours is a new or young company, how might you be able to take advantage of these changes to extract a tax-efficient income from your business? Of the few changes announced in the mini-Budget in September 2022 that survived were the seed enterprise investment scheme (SEIS) rules which are set to apply from April. The aim, to encourage more start-up investment in young companies, the new terms being:
- companies can raise SEIS capital in their first 3 years of trading instead of 2 years
- gross assets can be up to £300,000 instead of £200,000 at time of investment
- maximum SEIS funds raised over 3-years is £250,000 instead of £150,000
- maximum SEIS investment an individual can make per tax year is £200,000 not £100,000
The income tax break for buying SEIS qualifying shares in your new or young company is equal to 50% of the amount you paid for them. There are also capital gains tax breaks.
Having claimed your 50% income tax relief, you must keep the SEIS shares for at least 3 years or you lose the relief. During that time, you’re not allowed to receive any of your capital back, but your company can pay you dividends and if you are an employee or director, pay you a reasonable salary.
The trouble with dividends (generally the most tax-efficient method of taking income from a company) is they are paid out of company profits. If it makes losses or its profits are small in the first several years of trade, not uncommon, you’ll have your money tied up in shares that are producing little or no income.
Repay share capital and reinvest
One solution is for the company to repay part of your share capital, but only after the 3-year SEIS qualifying period has ended. This is now a relatively straightforward procedure. The repayment of share capital allows you to keep the money invested in your company but generate a decent and tax-efficient income from it, even if your company isn’t making profits.
Reinvest the capital in the company as a loan instead of in shares. It can pay you interest at a commercial rate on this and:
- will receive a corporation tax deduction
- there’s no PAYE tax or NI to worry about but the company may need to deduct basic rate tax (for which you receive a credit against your tax bill)
- receiving interest is a more tax-efficient method of extracting income from your company than salary or taxable benefits in kind
- up to £1,000 of the interest is tax free for you
- you can double these tax benefits if you’re married or have a partner and the loan to your company is made jointly; and finally
- with interest rates higher than they have been for years, you can lend the money for a fixed term at a relatively high fixed interest rate.
The April 2023 changes increase the sum you can invest in your company and qualify for SEIS tax breaks. After three years, consider repaying some share capital and reinvesting it as a loan. This is an especially good idea if the company doesn’t have sufficient profits to pay dividends as it allows you to take a tax-efficient income in the form of interest.
For help with your business finances including calculating your treatment of any SEIS funding, get in touch with our friendly experienced tax team on Let’s Talk.