How SEIS Funds Work: A Detailed Guide for Founders & Investors

The Seed Enterprise Investment Scheme (SEIS) encourages investment in early-stage startups by offering generous tax incentives. SEIS funds pool capital from multiple investors into qualifying companies, making this scheme more accessible and less risky for both sides. Here’s a breakdown:

1. What Are SEIS Funds?

• SEIS funds are investment vehicles dedicated to SEIS-eligible startups.

• They can be structured as managed portfolios or approved funds, managed by FCA-authorised managers 

• Benefits include diversified exposure and professional fund oversight.

2. How SEIS Funds Help Investors

• Diversification: Instead of a single-company investment, SEIS funds spread risk across multiple startups

• Convenience: Professional fund managers handle due diligence, paperwork, and compliance, easing the administrative burden

• Access: Funds offer access to high-growth startups, often providing investment minimums from £10,000.

3. How SEIS Funds Work Step by Step

1. Setup & Authorisation
   The fund (or portfolio) is structured to comply with HMRC’s SEIS requirements, usually as bare trusts or pooled funds with alternative investment fund manager (AIFM) authorisation.

2. Capital Commitment
   Investors commit funds (e.g., £10,000+), which are held centrally and later deployed into startups that meet SEIS criteria.

3. Advance Assurance
   Each investee company typically obtains HMRC’s SEIS Advance Assurance, ensuring tax relief eligibility.

4. Deployment into Startups
   The fund invests in a diversified portfolio of SEIS-eligible companies.

5. Tax Relief for Investors
   Investors claim:

• 50% income tax relief on their SEIS investment

• CGT exemption on gains after 3 years

• Loss relief if an investment fails

• Inheritance Tax relief after 2 years

6. Exit and Returns
   Exits generate returns—gains on SEIS shares held ≥3 years are CGT-free—but liquidity may take years due to shareholdings in private companies.

4. Key Considerations

• High Risk: Startups are high-risk; potential total loss is possible. Tax relief reduces downside, but caution is advised.

• Illiquidity: SEIS investments are not tradeable on public markets, and shares must be held for a minimum of 3 years.

• Tax Qualification: The fund must maintain SEIS compliance, and investee companies must secure advance assurance.

Fees: SEIS funds often charge upfront and annual management fees, which can affect net returns.

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5. SEIS Funds vs. Direct Investing

Feature	SEIS Fund	Direct SEIS Investment
Diversification	✔ Multiple companies	✘ Single-company risk
Due Diligence	✔ Managed by professionals	✘ Self-managed
Minimum Commitment	£10k–25k + usually required	Flexible
Costs	Management fees apply	Only legal/paperwork costs
Control	Shared across portfolio	Full control over investment

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6. Who Are SEIS Funds For?

Ideal for:

• Investors seeking diversification with tax relief

• Those with limited time or appetite for individual deal evaluation

• Accredited or retail investors supported by regulated fund managers

7. How to Choose an SEIS Fund

• Check FCA Authorisation: AIFM or UCIS compliance.

• Review Track Record: Look for manager experience and portfolio performance.

• Understand Fees: Transparent fee structure—entry, exit, ongoing.

• Check Minimum Subscription: Most funds require a minimum investment around £10,000

Conclusion

SEIS funds offer a structured, tax-efficient route into early-stage investments. They reduce risk through diversification, provide professional management, and open doors to high-growth private companies. However, it remains crucial to understand risks, holding periods, and fees before investing.

At Upstack, we support both companies and investors in navigating the SEIS process from advance assurance to fund preparation.

Want to learn more about creating or investing in SEIS funds?

Book a call with our (S)EIS tax experts.

Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. SEIS and EIS eligibility, tax reliefs, and compliance requirements are subject to HMRC regulations and may change. Investors and businesses should seek independent professional advice before making any financial or investment decisions.