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Seed Enterprise Investment Scheme (SEIS)
SEIS was introduced on 6 April 2012 and is designed to help small start-up business obtain equity finance. There are various qualifying conditions that a company must satisfy in order to raise finance via SEIS and generous tax advantages available for the investor. SEIS is not available for companies that have already received EIS or VCT investments.
An individual can claim relief on up to £100,000 of investment each year under SEIS.
A Company can raise a maximum of £150,000 in total under SEIS.
The Issuing Company Requirements
The company must be an unquoted trading company which is not under the control of another company. There can be subsidiaries however these too must satisfy the relevant requirements and any prescribed limits will then apply for the group as a whole and not just the issuing company.
The company’s gross assets must not exceed £200,000 immediately before the share issue and there must be less than 25 full-time (or full time equivalent) employees.
The trade carried on by the company must be less than two years old. The important point to note here is that the legislation stipulates that the trade starts with the first commercial transaction undertaken, whether that be by the issuing company or by any another person.
The Investor Requirements
The investor must subscribe for new ordinary shares with no preferential rights – a purchase of shares from another shareholder will not attract relief. The investor or an ‘associate’ of the investor, cannot be ‘connected’ with the issuing company. For these purposes ‘connected’ is defined as:
When considering the above, ‘associate’ includes parents, grandparents, children, partners, and their spouses.
The investor must then keep the shares for a minimum period of 3 years in order to retain the tax reliefs, as detailed below.
THE RISK TO CAPITAL CONDITION
The investment must meet the risk to capital condition for SEIS relief to be granted. This means the investment must be used for growth and development and the investment be a risk to the investors capital, i.e. the investment cannot be secured in any way and there must be a real risk that the investor will lose more than they are likely to gain as a net return.
THE INCOME TAX RELIEFS
By subscribing for qualifying SEIS shares (which are ordinary shares with no preferential rights) the investor will receive 50% income tax relief. By way of an example an investment of £100,000 will result in a reduction to the investor’s tax liability of £50,000 such that the net cost to the investor is actually £50,000. As the maximum that can be invested by an individual in any one year is £100,000 the maximum income tax relief is £50,000 per annum.
If the shares are disposed of within the 3-year holding period any income tax relief given is clawed back. Investments made in one tax year are eligible for relief in that year or can be treated as made in the previous tax year.
Further income tax relief may be available if the shares are sold at a loss, see below.
THE CAPITAL GAINS TAX RELIEFS
Provided that the SEIS shares are held for 3 years any capital gains realised on any eventual sale will be free of CGT.
Furthermore SEIS ‘Reinvestment Relief’ also enables capital gains realised on any assets to be reduced by 50% based on the lower amount of either the gain or the value of shares subscribed for. For example if there are capital gains of say £5,000 in a tax year and an investment of £10,000 is made, 50% of the £5,000 becomes exempt from CGT. Again the shares need to be held for a minimum period of 3 years in order to preserve this tax advantage.
In the unfortunate event that any loss arises on a disposal of the SEIS shares at any time this loss will be allowable for CGT purposes. Furthermore an additional relief is available such that the loss can be offset against income providing for further income tax relief.
It should be noted that, capital gains cannot be rolled over into SEIS shares investments.
For Advice Contact – Anthony Rose – Antony.Rose@sgllp.co.uk
Posted on 16th Nov 2023
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