Insights
Tax Efficient Investing

SEIS reinvestment relief: what is it and how does it work?

Reinvestment relief is one of a range of generous tax incentives the Seed Enterprise Investment Scheme (SEIS) offers, but even some experienced investors aren’t aware of the full extent to which this relief can minimise their tax bill.

How does SEIS reinvestment relief work?

Capital gains reinvestment relief allows an individual who has disposed of a chargeable asset  - that would normally be liable to capital gains tax (CGT) - to treat up to 50% of the gain as capital gains tax exempt should they reinvest some or all of it into SEIS qualifying shares.

To gain full SEIS reinvestment relief the investor must have claimed income tax relief on the investment, before choosing to reinvest a sum of their gains at least equal to the value of their CGT chargeable gain. Should they invest less, reinvestment relief is limited to half the amount invested.

Chargeable assets (assets qualified by the government as liable to capital gains tax) among other items, include personal possessions (exceeding £6,000), properties (excluding your first home) and shares (other than those being held in tax efficient schemes).

These assets are charged at a rate of 20% CGT for higher rate and additional rate taxpayers in the UK with the exception of residential property - for which a 28% deduction applies.

 

Tax Bracket

Income range

CGT rate on assets

CGT rate on property

Basic rate payer

£12,571 to £50,270

10%

18%

Additional rate payer

£50,271 to £150,000

20%

28%

Higher rate payer

Over £150,000

20%

28%

 

For example: this would mean that, should an additional or higher rate taxpayer sell shares gained elsewhere than the SEIS and realise a £40,000 gain, where usually they would be liable to pay £8,000 in CGT (20%), using SEIS reinvestment relief, should they reinvest the full sum of the gain into SEIS qualifying shares, this charge would be reduced by 50%, saving the individual £4,000. 

 

What is the maximum you can invest with EIS reinvestment relief?

In any given year, the maximum an investor is allowed to claim via SEIS reinvestment relief is no more than half of the SEIS income tax relief maximum for that year. 

In the 2022/23 tax year, the maximum figure an investor is able to claim SEIS income tax relief on is £100,000, making the maximum SEIS reinvestment relief for this year £50,000.

At its very peak this would mean, for example, that should an in individual sell a property (other than their first home) and realise a £100,000 gain, where usually they would be liable to pay £28,000 in CGT, using SEIS reinvestment relief - should they reinvest the full sum of the £100,000 gain into SEIS qualifying shares - this charge would be reduced by 50%, saving the individual £14,000 per year in capital gains tax.

Investors can use of reinvestment relief relatively flexibly around their personal tax liabilities, with this relief able to be utilised can on a gain made up to 5 years after an SEIS investment was made. Should the investor instead wish to claim reinvestment relief on a gain that was realised in the previous tax year, the SEIS is able to facilitate this too through its carry back feature.

Though the extremes of this generous tax relief show just how significant of an impact it can have on reducing an investor’s tax bills - especially in the cases of high net worth and experienced investors - the ability to be able to cut CGT tax in half is an invaluable tool, especially in the run up to a 2022/23 in which many predict a CGT hike.

 

Incorporating SEIS as part of a balanced investment portfolio

Whilst an undeniably powerful tax relief available to investors that choose to utilise the SEIS, reinvestment relief isn’t the scheme’s only added advantage.

From 50% income tax relief to capital gains tax exemption and loss relief, a host of generous tax reliefs are available under the SEIS, each angled with the goal of minimising downside risk, maximising investor returns and subsequently reducing the investor’s tax bills.

Whilst it is important to note that early stage investing comes with real risks, by actively seeking out promising, impact driven startups and reputable co-investment opportunities, the SEIS offers investors a rare opportunity to positively diversify their portfolio, generate potentially high growth, and significantly reduce their tax bill all whilst contributing to UK’s dynamic startup ecosystem.

 

Download: Free Guide to The Seed Enterprise Investment Scheme

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.