SEIS loss relief

What is SEIS loss relief?

SEIS loss relief is one of the tax incentives offered under the UK’s Seed Enterprise Investment Scheme (SEIS). If an investor provides funding for an SEIS-qualifying company and their investment falls below its initial value, they may be able to claim SEIS loss relief to mitigate the financial impact.

While loss relief doesn’t necessarily allow investors to recover all of their money, it can be an effective safety net for early-stage, high-risk investments – especially when combined with other SEIS tax reliefs (such as capital gains tax deferral, reinvestment relief and inheritance tax relief).

How loss relief works

An investor may be eligible for SEIS loss relief if:

• They sell their SEIS shares at a loss (i.e. for less than the purchase price), or

• The value of their shares becomes negligible (e.g. if the company shuts down)

Claiming loss relief on SEIS shares allows investors to set the loss amount against their income tax or capital gains tax (CGT) bill. Any SEIS income tax relief the investor has already received from HMRC will also be factored in.

SEIS loss relief examples

There are three possible scenarios that could trigger a loss relief claim:

1. Company acquisition

If a founder decides to sell their startup, investors’ shares are typically transferred to the buyer. As long as SEIS investors have held their shares for at least three years before the sale, they won’t have to pay CGT on any increase in value since the initial investment. On the other hand, shares sold at a loss might be eligible for SEIS loss relief instead. 

If an investor disposes of their SEIS shares before the three-year time limit, they may have to repay HMRC for any income tax relief they already claimed.

2. Voluntary liquidation

If the company shuts down voluntarily and for a genuine commercial reason – such as insolvency – SEIS investors may be able to claim loss relief on what’s known as a ‘deemed disposal’ (since they haven’t actually sold their shares). Depending on the liquidation circumstances and how long the SEIS shares were held for, HMRC might withdraw all or some of the income tax relief initially received.

3. Zombie state

So-called ‘zombie companies’ generate just enough cash to stay afloat, but not enough to keep growing. Since the company is technically still trading, investors can’t dispose of their shares by selling them. 

However, they may be able to make a negligible value claim by informing HMRC that their shares are effectively worthless. If HMRC decides this claim is competent, the investor can then also claim loss relief on the deemed disposal of their shares. Note that, if the company later recovers, any shares sold will be subject to CGT.

How to claim SEIS loss relief

The process of calculating and claiming relief varies for different loss scenarios and individual needs – including whether investors want to offset the loss against their income tax or CGT.

Loss relief and income tax

If investors choose to claim SEIS loss relief as an income tax deduction, they have 12 months (starting from the 31 January following the loss) to make their claim. For example, if they sold their SEIS shares in the 2022/23 tax year, the loss relief deadline would be 31 January 2025.

The process depends on which year they’re claiming for:

• Current tax year: request a PAYE tax code change from HMRC or adjust their self-assessment tax payments 

• Previous tax year: claim via their self-assessment tax return by completing an SA108 form (capital gains summary)

It’s possible to claim loss relief for both years if the investor doesn’t have enough taxable income in a single year.

Loss relief and capital gains tax

Alternatively, investors can claim loss relief in the form of capital gains tax relief. In this case, the time limit is four years following the end of the tax year in which the loss happened. 

If an investor chooses to apply loss relief to the current tax year, the loss amount will be deducted from their chargeable gains before CGT. If the loss exceeds their capital gains allowance for the current year, any excess is carried forward to future tax years and set against the first available gain.

Refer to the UK government website for more information on claiming SEIS loss relief.

Calculating the loss relief value

The amount of loss relief an investor can claim depends on:

• The price at which they sell their shares or the ‘effective loss’ (should the value of the investment fall to zero)

• The amount of SEIS income tax relief they already received

• The rate of income tax or CGT they usually pay

Worked example 1

Jane Doe invests £100,000 in a startup through SEIS and receives 50% income tax relief (£50,000). If the company fails after three years and the value of her shares falls to zero, she could claim relief on the initial investment amount minus any income tax relief already received (£100,000 - £50,000 = £50,000).

To calculate the loss relief value, Jane must then multiply the effective loss (£50,000) by her marginal income tax rate. Being on the higher tax band (40%) would allow her to recover £20,000. However, if Jane decided to set the loss against her CGT bill instead, she could claim a maximum of £10,000 in loss relief (using the higher CGT rate of 20%).

The table below shows the possible outcomes for different tax bands:

Worked example 2

John Smith makes a £200,000 SEIS investment and claims 50% income tax relief (£100,000). After a difficult five years, the company gets acquired and John sells all his SEIS shares for £80,000.

Since John held the shares for more than three years, HMRC won’t withdraw any of his income tax relief. The effective cost of this investment (amount invested minus income tax relief) is £100,000. To calculate the effective loss available for relief, he must factor in his income tax relief and sale proceeds: £100,000 - £80,000 = £20,000.

If John decides to set the loss amount (£20,000) against his chargeable gains (at a marginal rate of 10% CGT), he could claim £2000 in SEIS loss relief. Alternatively, setting the £20,000 against his income tax liability (at the basic rate of 20%) would result in a loss relief value of £4000.