The Seed Enterprise Investment Scheme complements the Enterprise Investment Scheme
and is attractive to start up companies and investors in such companies. At Kelley &
Lowe Limited, we can provide help if you are interested in financing your start up
business in the Dartford area or you are interested in providing seed capital to
such businesses.
The Seed Enterprise Investment Scheme (SEIS) provides tax relief for individuals prepared
to invest in new and growing companies. It is the junior version of the Enterprise
Investment Scheme (EIS). Investors can obtain generous income tax and capital gains tax
(CGT) breaks for their investment and companies can use the relief to attract additional
investment to develop their business.
Key features
The key features of the relief can be summarised as follows (figures are those
applicable from 6 April 2024):
- a qualifying investor will be able to invest up to £200,000 into qualifying
companies in a tax year
- they will receive income tax relief of up to 50% of the sum invested
- unused relief in one tax year can be carried back to the preceding tax year if there
is unused relief available for that year
- the maximum amount that a company can attract in investment qualifying for the SEIS
is £250,000 in total
- the company must not have assets of more than £350,000 before any SEIS
investment
- an individual who makes a capital gain on another asset and uses the amount of the
gain in making a SEIS investment will not pay tax on 50% of the liability, subject
to certain conditions
- there is a huge amount of anti-avoidance legislation to prevent exploitation for tax
avoidance purposes.
Who can invest?
The official term is a ‘qualifying investor’. The primary requirement is that
the investor or someone who is associated with them must not be an employee of the
company in which the investment is being made. They can however be a director. They must
also ensure that they do not have (directly or indirectly) a substantial interest in the
company. This is defined by reference to holding more than 30% of any of the following
(in either the company itself or a 51% subsidiary of the company):
- ordinary shares
- issued shares
- voting rights
- assets in a winding up.
Which shares qualify?
The shares must be ordinary shares which have been subscribed for wholly in cash and are
fully paid up. They must be held for a three year period from the date of issue. The
company must have issued the shares for the purpose of raising money to fund a
qualifying business activity which either involves the carrying on (or preparations to
carry on) a new trade. Using the funds to meet the costs of research and development
intended to create or benefit a new qualifying trade will also be acceptable. The money
must be spent within three years of the date of issue of the shares. The anti-avoidance
requirement is that there must be no pre-arranged exit for the investor involving the
purchase of the shares, or the disposal of assets.
Which companies qualify?
The rules are intended to benefit new companies. The basic requirements are that the
company must be unquoted. The trade must be a 'new' qualifying trade. This is one not
carried out by either the company or any other person for longer than three years at the
date the shares are issued. The company must exist wholly for the purpose of carrying
out one or more qualifying trades throughout the three-year period from the date of
issue of the shares. If the company goes into receivership or administration or is wound
up during this period, this will not prevent the relief being given, provided there was
a commercial justification for the action.
The other main conditions relating to the company can be summarised as follows:
- the company must have a permanent establishment in the UK
- the company must be effectively solvent at the date of issue of the shares
- the company may have a qualifying subsidiary
- the company must not be a member of a partnership
- immediately before the investment, the gross assets of the company plus the value of
any related entity (one that holds more than 25% of the capital or voting power in
the issuing company) must not exceed £350,000
- there are fewer than 25 full-time employee equivalents in the company and any
related entity
- the company must not have had EIS or Venture Capital Trust (VCT) investment before
the SEIS shares are issued
- the total amount of investment made under the SEIS in the company must not exceed an
aggregate of £250,000.
Which trades qualify?
The primary requirement is that the company must carry on a genuine new trading venture.
There may be a problem if the same activities had been carried on as part of another
trade. Basically any trading activity will qualify unless it is an excluded activity
within the definitions used for the EIS. This means that activities such as property
development, retail distribution, hotels, nursing homes and farming will not qualify.
The trade must be carried out on a commercial basis.
How is relief obtained?
The relief is given as a reduction against the total tax liability for the year but
cannot turn a tax liability into a tax repayment. In that situation the individual would
be able to carry back the unused relief to the preceding tax year for use if there was
any tax unrelieved for that year.
Examples
Samantha invests £60,000 under the SEIS. Potentially her tax relief is 50% of
her investment which is therefore worth £30,000. As her tax liability for the
year is £45,000, the maximum relief is available to reduce her tax liability
to £15,000.
Richard also invests £60,000 under the SEIS. His forecast tax liability is only
£20,000 so the claim to relief under the SEIS will be limited to £20,000
for that tax year. However, Richard can in addition make a claim to carry back the
unused relief of £10,000 (£30,000 less £20,000 relieved) to the
preceding tax year.
The relief must be claimed and requires a certificate from the company issuing the
shares.
Can the relief be withdrawn?
The short answer is 'yes' if certain events happen within three years of the date on
which the shares are issued. The most obvious event is the disposal of the shares in
that period. There are complex rules that will cause the relief to be withdrawn if the
investor receives 'value' from the company during this period.
What about the CGT position?
Where shares are sold more than three years after the date on which they are issued, then
any resulting gain is free of CGT. Shares sold within three years would be chargeable
but may qualify for Business Asset Disposal Relief (BADR) if the various conditions are
met.
Where a disposal is exempt for gains purposes, this would normally mean that a loss would
not be allowable for CGT purposes, but an allowable loss is available under the scheme.
Where SEIS income tax relief has been obtained and is not withdrawn then the capital
loss is reduced so that tax relief is not duplicated.
Example
Murat invested £25,000 in the SEIS for which he received £12,500 relief
against his income tax liability of £35,000. If 4 years later the company is
unsuccessful and is liquidated with no value returned to the shareholders then his
allowable capital loss will be £12,500, being the amount invested of
£25,000 less the income tax relief obtained of £12,500.
Clearly investors will hope that they are not in a capital loss position but where
this does happen, the allowable loss qualifies for relief against either gains or
income. The facility to use a capital loss against income is only available in
certain specified circumstances which include a capital loss on the SEIS. It can be
used in the year of the loss and/or the preceding year to relieve net income and can
therefore potentially save tax at the individual's highest rate of tax.
A bonus exemption
There is also an additional exemption where assets are disposed of at a gain in that year
and funds equal to the amount of the gain are invested in SEIS shares. Reinvestment
relief is available at 50% of the matched gain where the proceeds are invested in SEIS
shares.
Where only part of the gain is invested in such shares then only that part is exempt. The
maximum gain to be relieved is capped at £200,000. Further, this relief will only be
allowed where the investment also qualifies for income tax relief and a claim is made.
If for any reason the SEIS relief is withdrawn on the shares then the gain will be
reinstated.
Example
Isaac sells some more quoted shares for £200,000, making a gain of
£80,000. He invests £80,000 of the proceeds in new shares which qualify
under the SEIS. He will be able to claim a reduction of £40,000 (being 50% of
the amount invested in the SEIS) in the chargeable gain on the shares.
Comparison to EIS
The SEIS supplements the EIS. Some aspects of both schemes are similar but there are also
key differences. These are not considered in detail here, however, consider the position
of the individual investor. Under the EIS those investing up to £1 million receive
income tax relief at up to 30%. From a tax relief perspective on investments up to
£200,000, the SEIS is more favourable but it clearly cannot be used for larger
investments.
How we can help
The Seed Enterprise Investment Scheme complements the existing EIS and related
Venture Capital Trust investment schemes as it may be an alternative way of
attracting funds at a time when it is still difficult to obtain finance from
traditional sources such as banks. Great care will be required to ensure that all
opportunities to use it are obtained for investor and qualifying company alike.
Please do contact us, at
Kelley & Lowe Limited, if you are interested in a start up in the Dartford area.