The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) offer significant tax reliefs, including SEIS loss relief, to mitigate investment risks. SEIS loss relief allows investors to offset losses against their taxable income, providing a valuable safety net. Here’s a detailed explanation of how SEIS/EIS loss relief functions and the conditions for claiming SEIS/EIS loss relief, applicable to both connected and unconnected investors.
SEIS loss relief reduces the financial impact when an investment does not perform as expected. Investors can offset losses against their other taxable income, thereby reducing their overall tax liability. This loss relief benefits both connected and unconnected investors, though they must meet specific conditions to qualify. Additionally, understanding how SEIS/EIS loss relief interacts with other tax relief forms is crucial to maximising your investment strategy.
Connected investors, such as company directors or major shareholders, can claim SEIS/EIS loss relief on the capital loss but not on the income tax relief. This means they can offset the loss against capital gains, helping to reduce their overall Capital Gains Tax (CGT) liability. However, the limitation on income tax relief can reduce the overall tax benefits.
Unconnected investors who are not closely linked to the company can claim SEIS loss relief against their income tax. This provides a more substantial loss relief, making it a more attractive option for those looking to minimise their taxable income. The ability to offset losses against income tax, rather than just capital gains, enhances the effectiveness of SEIS and EIS as risk mitigation tools.
Scenario: Jane invests £10,000 in an SEIS-eligible company. Unfortunately, the company fails, and her shares become worthless.
Claim: Jane can initially claim 50% income tax relief (£5,000). The remaining loss (£5,000) can then be offset against her taxable income.
Outcome: If Jane’s tax rate is 40%, she can reduce her tax liability by an additional £2,000, making her effective loss only £3,000. This significant reduction in her overall loss showcases the strength of SEIS/EIS loss relief for unconnected investors.
Scenario: John, who is a director with a 20% shareholding, invests £10,000 in an SEIS-eligible company that eventually fails.
Claim: John can only claim SEIS/EIS loss relief against capital gains, not income tax, due to his connection to the company.
Outcome: If John has capital gains, he can offset the £10,000 loss against these gains, reducing his overall CGT liability. Although John doesn’t benefit from income tax relief, the ability to offset the loss still provides a valuable tax-saving opportunity.
Both SEIS and EIS provide robust safety nets through tax reliefs and SEIS/EIS loss relief, making high-risk investments more attractive. These schemes offer a range of benefits that can significantly enhance the attractiveness of investing in smaller, high-potential companies.
At Apex Accountants, our SEIS specialists UK have extensive experience in helping investors navigate the complexities of SEIS/EIS loss relief. We understand that each investor’s situation is unique, and we can assist you with:
Utilising SEIS/EIS loss relief significantly mitigates investment risks. Whether you are a connected or unconnected investor, SEIS and EIS provide valuable safety nets to protect your investments. Contact our SEIS specialists UK today for personalised advice and effective navigation of the claiming process.