What is SEIS loss relief?

In the UK, startup investments which qualify for the Seed Enterprise Investment Scheme (SEIS) allow you to offset investment losses on your tax bill, subject to certain conditions.

SEIS allows investors to choose if they want to use this tax relief to reduce their income tax (IT) liability or their capital gains tax (CGT) liability.

Typically, the available loss relief is calculated as:

• SEIS loss relief from capital gains tax (CGT) liability = (Effective loss − SEIS relief already received) × Capital gains tax rate
• SEIS loss relief from income tax (IT) liability = (Effective loss − SEIS relief already received) × Marginal income tax rate

However, governments always fine-tune regulations to eliminate the chance of anyone taking unfair advantage of such schemes. Because of the complexity of the resulting regulations, realising the benefit of this can be challenging.

Hence, in this article, we will review certain key concepts related to SEIS loss relief, its qualifying conditions, caveats, and help solidify your understanding through realistic examples.

When can investors claim SEIS loss relief?

Under SEIS, investors can claim loss relief if the shares are sold at a loss or if their value becomes negligible. So, SEIS allows you to mitigate your losses under three scenarios:

Disposal of shares at a loss

This includes transactions such as selling shares during funding rounds, acquisitions, buybacks, and Non-issuer transactions. If the consideration received is lower than the subscription price, you have made a loss that may qualify .

Voluntary liquidations

When a seed enterprise is closing shop for genuine reasons like bankruptcy, and the value of shares becomes negligible, you can claim SEIS loss relief. Conversely, if the company is technically closing down to incorporate as a different type of firm, you may not qualify for this.

Negligible value claim

If a seed enterprise is technically still operational but shows clear signs of collapse, investors can get loss relief through SEIS. To qualify for this benefit, you must make a negligible value claim with His Majesty’s Revenue and Customs (HMRC). In such cases, when the company recovers, any shares sold will be subject to CGT. So, the negligible value claim effectively negates SEIS’s CGT relief.

How much SEIS relief can you claim?

As mentioned earlier, you can calculate your SEIS loss relief by subtracting the SEIS relief already received from the effective loss and multiplying the resulting figure by your chosen tax rate. However, you must note that income tax relief is withdrawn, fully or partially, if the shares are not held for at least 3 years.

The amount to be withdrawn is the smaller of the following two values:

• Relief originally attributable to the shares
• SEIS tax rate (50%) × Consideration received for those shares

If you claimed less than the possible relief, maybe because of limited tax liability, then the consideration received must be reduced by multiplying it by the ratio of relief claimed to relief originally available. Then, the SEIS tax rate of 50% can be applied.

Let’s understand these through a few examples.

Case 1: Shares are held for 3 years, and all of them are sold at a loss

Suppose your £20,000 startup investment qualifies for SEIS income tax relief, which can be calculated as:

SEIS income tax relief = SEIS investment × SEIS tax rate

= £20,000 × 50%

= £10,000

Loss Calculation: Now, 4 years later, you dispose of all of these shares for £5,000. So, your effective loss comes out to £15,000. Then, your SEIS loss relief can be:

Option 1: CGT relief = (Effective loss – SEIS relief already received) × Capital gains tax rate

= (£15,000 – £10,000) × 24%

= £5,000 × 24%

= £1,200

Option 2: Income Tax (IT) Relief

IT relief = (Effective loss – SEIS relief already received) × Marginal income tax rate

= (£15,000 – £10,000) × 40%

= £5,000 × 40%

= £2,000

If your income tax liability is greater than the IT relief available, then you can maximise your tax savings by simply choosing the income tax relief.

However, sometimes when your income tax liability is smaller than the IT relief, choosing CGT relief might be the better choice.

Case 2: Shares held for less than 3 years and sold at a loss

Let’s assume that you made the same £20,000 startup investment, which qualified for a £10,000 SEIS income tax relief.

Now, 2 years later, you sold these shares for £10,000. The amount of income tax relief to be withdrawn will be the lesser of: So, in this case, income tax relief of £4,000 will be withdrawn.

Option 1: Relief attributable to the shares.

Since all shares were sold, the entire SEIS income tax relief of £10,000 is attributable to these shares.

Option 2: Consideration received for these shares times the SEIS tax rate

= £8,000 × 50%

= £4,000

After the withdrawal, the SEIS relief you have already received will be = SEIS income tax relief – Withdrawn relief

= £10,000 – £4,000

= £6,000

Then, your SEIS loss relief can be calculated as:

Option 1: Capital gains tax (CGT) relief

= (Effective loss – SEIS relief already received) × Capital gains tax rate

= (£10,000 – £6,000) × 24%

= £4,000 × 24% 

= £960

Option 2: Income tax (IT) relief

= (Effective loss – SEIS relief already received) × Marginal income tax rate

= (£10,000 – £6,000) × 40%

= £4,000 × 40%

= £1,600

Case 3: Shares held for less than 3 years, sold at a loss and less than the possible relief claimed

Suppose you made a £100,000 SEIS-qualifying investment, unlocking a possible income tax relief of £50,000 (50% of £100,000).

But your income tax liability was only £40,000. So, you claim an income tax relief of £40,000 out of a possible £50,000.

Then, the ratio of claimed versus possible relief = £40,000 ÷ £50,000 = 80%

Now, two years later, these shares are sold for £30,000.

First, we will calculate the SEIS relief withdrawn as the lesser of the following two values:

Option 1: Relief attributable to the shares

Since all shares were sold, the entire SEIS income tax relief of £40,000 is attributable to these shares.

Option 2: Consideration received for these shares times the ratio of claimed versus possible relief, times the SEIS tax rate

= £30,000 × 80% × 50%

= £24,000 × 50%

= £12,000

Since £12,000 is less than £40,000, that will be the SEIS relief withdrawn in this case.

Then, SEIS relief received = SEIS income tax relief originally received − SEIS relief withdrawn

= £40,000 − £12,000    

= £28,000

Now, your SEIS loss relief can be calculated as:

Option 1: Capital gains tax (CGT) relief

= (Effective loss – SEIS relief already received) × Capital gains tax rate

= (£70,000 – £28,000) × 24%

= £42,000 × 24%

= £10,080

Option 2: Income tax (IT) relief

= (Effective loss – SEIS relief already received) × Marginal income tax rate

= (£70,000 – £28,000) × 40%

= £42,000 × 40%

= £16,800

Eqvista – Turning Early-Stage Risk into Measurable Tax Advantage!

SEIS is designed to encourage investment in the UK’s most innovative, high-risk startups, and loss relief is a crucial part of that protection. By allowing losses to be offset against income tax or CGT, SEIS significantly reduces the financial downside of investing in startups.

Understanding effective loss, how disposal timing affects relief, and how SEIS withdrawal works ensures that investors can make accurate assessments and unlock tax savings.

If you need assistance with such assessments, consider reaching out to Eqvista. Our seasoned valuation analysts and tax experts can provide defensible reports that help maximise your tax savings. Contact us to know more!