Confirmed SEIS Changes in April 2023

The seed enterprise investment scheme (SEIS) will undergo changes beginning in April 2023. If your company is new or young, how might you be able to take advantage of these changes to generate a tax-efficient income?

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Mini-budget and Above

Very few of the changes announced in the September 2022 mini-Budget made it into law. Several of those did pertain to the seed enterprise investment scheme (SEIS), which will go into effect in April 2023. The government hopes that the changes will encourage more investment in new businesses. In summary, the changes are as follows:

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• Companies can raise SEIS capital in their first three years of operation rather than two.
• A company's gross assets at the time of investment can be up to £300,000 rather than £200,000.
• Instead of £150,000, the maximum SEIS funds that can be raised over a three-year period can be £250,000; and
• An individual's maximum SEIS investment per tax year will be £200,000 rather than £100,000.

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Tip: The income tax deduction for purchasing SEIS-qualifying shares in your new or young company is equal to 50% of the purchase price. There are also tax breaks for capital gains.

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Trap. After claiming your 50% income tax relief, you must keep the SEIS shares for at least three years or the relief will be lost. During that time, you are not permitted to receive any of your capital back, but your company may pay you dividends and a reasonable salary if you are an employee or director.

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Trap. The problem with dividends (which are generally the most tax-efficient way of receiving income from a company) is that they can only be paid out of the profits of your company. If it loses money or makes small profits in the first few years of trading, which is not uncommon, you'll have your money tied up in shares that are producing little or no income.

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Repay Share Capital and Reinvest

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One option is for the company to repay a portion of your share capital after the three-year SEIS qualifying period has expired (see The next step ). This is now a relatively simple procedure. The repayment of share capital allows you to keep the money you invested in your company while earning a decent and tax-efficient income even if your company is not profitable.

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• It will be exempt from corporate taxes.

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• There is no PAYE or NI to be concerned about, but the company may be required to deduct basic rate tax (for which you receive a credit against your tax bill)
• Receiving interest from your company is a more tax-efficient method of obtaining income than salary or taxable benefits in kind.
• You can deduct up to £1,000 in interest.
• If you are married or have a partner and the loan to your company is made jointly, you can double the tax benefits, and finally,
• You can lend the money for a fixed term at a relatively high fixed interest rate now that interest rates are higher than they have been for years.

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The changes in April 2023 increase the amount you can invest in your company and qualify for SEIS tax breaks. Consider repaying some of your share capital and reinvesting it as a loan after three years. This is especially beneficial if the company does not have enough profits to pay dividends because it allows you to earn tax-free income in the form of interest.

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