When it comes to investing in startups in the UK, definitely, there are numerous features to reflect on. Amidst all, SEIS investment funds have been quite a major highlight. Basically, the Seed Enterprise Investment is a scheme initiative set in motion by the government of the UK to promote innovation and help early-stage startups and small-scale enterprises to raise capital from individual investors. It fundamentally takes place through the provision of a series of tax reliefs on stakes made into eligible businesses.
In order to procure SEIS, the business must utilise any capital raised for a qualifying business pursuit. For example, it could be hiring, research & development, product development, or even marketing. Today, through this article, we will quote the rules one should be aware of before investing in SEIS investment funds as an investor.
- The investor must have a UK-based source of income.
While investing in a similar opportunity, investors must have a UK source of funds. However, you do not need to be a UK resident to claim the benefits of SEIS in general. To retain the relief, investors must keep the shares for a minimum period of three years from the date of issuance. Eventually, the retained relief may be reduced or withdrawn if the investors dispose of it within three years. It is also applicable if any of the standard qualifying requisites do not meet before the date of the termination of the stakes.
- Must not own a substantial interest
The Seed Enterprise Investment Scheme interest is narrated as being indirectly or directly entitled or owned to take possession of more than 30% of the company’s interest. Well, the 30% fraction also considers the shareholdings of the fellow workers. Confirming the rules, for any time from the alliance of the company until three years of the issuance of the shares, investors must not have any substantial interest in granting the company.
- Should not be a company employee
Through the date of the share issuance, investors or any of their fellow shareholders should not be an employee of the company for upto three years. However, you still can stand as a paid director of the company. Your business co-workers, trustees, board members, relatives, and civil partners are considered associates. However, your siblings are not quoted under the same condition. As mentioned earlier, you can still be a chairman/director and receive appropriate compensation for this position.
Apparently, the angel investors who invest in startups are permitted to apply for SEIS relief. The rule of allowing in business angels, although, is restricted. It can only happen when:
- At any situation in a time when shares are issued, the chairman/director has never been affiliated with the business. Or the director has not participated in any part of the business, which is now carried on by the business or any of its subsidiaries, either as a director, owner, or employee.
- The issuance of shares shall occur before the termination period of the previous issue of eligible shares in respect of which the owner/director fulfilled the standard conditions.
- The issuance of shares of a previous issue of entitled shares in respect of which the director fulfilled the condition just cited is made before the termination period.
- Lastly, the issuance of shares was made prior to the period of termination of the earlier shares issuance, to which the chairman/director is entitled to SEIS tax relief.
- Should have no tax avoidance
Investors are eligible for tax reliefs under the SEIS investment funds if their subscription is created for legitimate purposes and not as a part of any scheme or agreement for avoiding taxes. Under the Seed Enterprise Investment Scheme, investors can invest upto £150,000. However, there is a certain limit to the tax relief investors can take advantage of, which is capped upto £50,000. The estimation of tax reliefs under the SEIS does not consider any amount you invested exceeding £100,000.
- Should not have any link loans
Investors and their associates should not make any loan related to their stake subscription at any moment from the business’s incorporation till the third anniversary of the shares issuance date. It eventually includes cases where debt due or credit is given from investors and their associates in general.
The Final Word
Ultimately, the most important part when you invest in startups or seek capital for the same is not to lose yourself in the hype. In order to get a clear notion of the business model, purpose, and mission, it is always a favourable idea to seek an expert’s advice beforehand.