SEIS Loss Relief: What it is and How to Claim it

A sister scheme to the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme was launched in 2012, and designed to promote investment into very early-stage companies by providing generous SEIS tax reliefs.

Over a billion pounds have been invested into thousands of businesses via the SEIS since its introduction. Much of this success has been linked to the scheme's ability to offset a proportion of any losses, reducing the overall risk while maintaining maximum upside.

One of the most interesting yet least understood of these tax advantages is SEIS loss relief. This tax relief empowers investors to minimise the impacts of a loss in the value of shares should an unexpected event arise, further enhancing the tax benefits available under the scheme.

Understanding SEIS Loss Relief

While SEIS investment opportunities are designed to support early-stage companies with high growth potential, SEIS offers loss relief to investors in the event that a loss is realised on their investment. This is achieved by offsetting the loss against your marginal rate of income tax or capital gains tax (CGT).

By offsetting a potential loss against their income tax bill for the current or previous tax year, or alternatively against their CGT bill for the current or future years, SEIS loss relief allows investors to mitigate some of the risks associated with investing in startups. This provides a safety net that encourages investment in innovative, high-potential ventures.

The more popular route, though not necessarily the most suitable for everyone due to personal tax circumstances, is to offset a loss against income tax relief. This usually provides a higher relief due to the higher rate of income tax compared to capital gains tax.

How SEIS Loss Relief Works

This first component of SEIS Loss relief is the income tax you receive when initially investing since loss relief can be claimed along with the 50% income tax that the scheme offers.

Income Tax Relief: SEIS offers a 50% income tax relief on investments up to £200,000 per tax year. For example, if you invest £10,000, you can reduce your income tax bill by £5,000. This upfront relief lowers the initial financial commitment, making it easier to invest in high-potential ventures.

SEIS Loss Relief: If your investment doesn't perform as expected, SEIS allows you to claim loss relief by offsetting the loss against your income tax or capital gains tax (CGT) liabilities.

• Income Tax Offset: You can apply loss relief at your marginal income tax rate—20% for basic rate taxpayers, 40% for higher rate taxpayers, and 45% for additional rate taxpayers.
• Capital Gains Tax Offset: Alternatively, you can offset the loss against your CGT liabilities, with rates of 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers.

Effective Loss Component: The effective loss would be reduced after the initial 50% income tax relief. For example, if you invest £10,000 and the company fails, the initial relief reduces your effective loss to £5,000.

In summary, SEIS loss relief, combined with income tax relief, offers a comprehensive framework for mitigating investment risks. These benefits not only incentivise investment in innovative startups but also empower investors to manage their financial exposure effectively.

Worked Examples of SEIS Loss Relief

Offsetting Against Income Tax

Scenario: An investor with a 45% income tax rate invests £20,000 in an SEIS-eligible opportunity. Unfortunately, the company fails, and the investment is lost.

1. Initial Income Tax Relief:
   1. The investor receives a 50% income tax relief on the investment.
   2. Relief Amount: £20,000 x 50% = £10,000
2. Effective Loss Calculation: 2. The effective loss after initial relief is: £20,000 - £10,000 = £10,000
3. Loss Relief Against Income Tax: 3. The investor can offset the effective loss against their income tax liability at a 45% rate.
   3. Additional Relief: £10,000 x 45% = £4,500
4. Total Tax Relief: 4. Total relief received: £10,000 (initial) + £4,500 (loss relief) = £14,500
5. Net Financial Exposure: 5. The actual financial exposure after all reliefs is: £20,000 - £14,500 = £5,500

Offsetting Against Capital Gains Tax

Scenario: An investor with an 18% capital gains tax rate invests £5,000 in an SEIS-eligible company. The investment is lost.

1. Initial Income Tax Relief:
   1. The investor receives a 50% income tax relief on the investment.
   2. Relief Amount: £5,000 x 50% = £2,500
2. Effective Loss Calculation: 2. The effective loss after initial relief is: £5,000 - £2,500 = £2,500
3. Loss Relief Against Capital Gains Tax: 3. The investor can offset the effective loss against their CGT liability at an 18% rate.
   3. Additional Relief: £2,500 x 18% = £450
4. Total Tax Relief: 4. Total relief received: £2,500 (initial) + £450 (loss relief) = £2,950
5. Net Financial Exposure: 5. The actual financial exposure after all reliefs is: £5,000 - £2,950 = £2,050

These examples illustrate how SEIS loss relief can significantly reduce the financial impact of an investment loss, providing investors with a robust mechanism to manage risk while supporting early-stage companies.

If you would like to calculate the SEIS tax reliefs for your own investment, using a SEIS tax relief calculator can help you do that.

Step-by-Step Guide to Claiming SEIS Loss Relief

Claiming SEIS loss relief begins with ensuring that your investment is in a company that qualifies for the scheme. If it's an EIS Eligible investment, then there is also EIS loss relief available.

It then involves confirming that the company meets specific criteria, such as being UK-based with fewer than 25 employees and having gross assets of no more than £200,000 at the time of investment. Once your investment is made, the company should provide you with an SEIS3 certificate, a crucial document for claiming any SEIS-related tax relief, including loss relief.

When you realise a loss on your investment, calculate the amount lost, which is typically the total investment minus any returns or residual value. You then have the option to offset this loss against your income tax or capital gains tax (CGT). The choice depends on your personal tax circumstances and which option offers the most benefit.

For income tax relief, include the loss in your self-assessment tax return, specifying the amount of loss relief you are claiming. If you choose to offset against CGT, adjust your capital gains calculations accordingly in your tax return, often done by an accountant.

Then ensure your tax return is submitted by the deadline, usually 31 January following the end of the tax year in which the loss occurred. It’s important to keep thorough records of your investment, the SEIS3 certificate, and any correspondence with HMRC, as this documentation may be required if HMRC requests further information.

Key Considerations When Claiming SEIS Loss Relief

Timing is a crucial factor when claiming SEIS loss relief. You can claim the relief in the tax year the loss is realised or carry it back to the previous tax year. Evaluating your income and tax liabilities in both years can also help you maximise this benefit.

It's important too to consider how claiming loss relief might affect other tax reliefs or allowances you are entitled to. For instance, using loss relief against income tax might impact your personal allowance if your adjusted net income exceeds certain thresholds.

If you have multiple SEIS investments, consider the cumulative impact of claiming loss relief on your overall tax position. Prioritising claims based on potential tax savings can be advantageous. Given the complexity of tax regulations, seeking professional advice from either a tax advisor or accountant can ensure you are maximising your tax reliefs while complying with HMRC policy requirements.

By understanding these considerations, you can effectively navigate the process of claiming SEIS loss relief and optimising your tax position while supporting innovative startups.

Investing in SEIS-Eligible Companies

Investing in SEIS-eligible companies not only supports the growth of innovative startups but, as discussed, offers you a range of attractive tax benefits. By taking advantage of the Seed Enterprise Investment Scheme, you can mitigate risks while potentially reaping significant rewards.

Ready to explore opportunities and maximise your investment potential? Download our comprehensive SEIS guide today and start your journey to more tax-efficient investing.