Business tax – guidance

Seed Enterprise Investment Scheme

Find out what help the Seed Enterprise Investment Scheme can give to small, early stage companies looking to raise equity finance.

Overview

The Seed Enterprise Investment Scheme (SEIS) is designed to help small, early-stage companies raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies. It complements the existing Enterprise Investment Scheme (EIS) which offers tax reliefs to investors in higher-risk small companies. SEIS is intended to recognise the particular difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate.

SEIS applies for shares issued on or after 6 April 2012. The rules have been designed to mirror those of EIS as it is anticipated that companies will go on to use EIS after an initial investment under SEIS.

Income Tax reliefs

Income Tax relief is available to individuals who subscribe for qualifying shares in a company which meets the SEIS requirements, and who have UK tax liability against which to set the relief. Investors don’t need to be UK resident.

The shares must be held for a period of 3 years, from date of issue, for relief to be retained. If they are disposed of within that 3 year period, or if any of the qualifying conditions cease to be met during that period, relief will be withdrawn or reduced.

Relief is available at 50% of the cost of the shares, on a maximum annual investment of £100,000. The relief is given by way of a reduction of tax liability, providing there is sufficient tax liability against which to set it. A claim to relief can be made up to 5 years after the 31 January following the tax year in which the investment was made.

Example: Jenny invests £20,000 in SEIS shares in the 2012 to 2013 tax year in SEIS. The relief available is £10,000 (£20,000 at 50%). The amount owed for the year (before relief) is £15,000 which she can reduce to £5,000 as a result of her investment.

Example: James invests £20,000 in the 2012 to 2013 tax year in shares. The relief available is £10,000 (£20,000 at 50%). The tax owed for the year (before relief) is £7,500. James can reduce his tax bill to zero as a result of his SEIS investment, but loses the rest of the relief available.

There is a ‘carry-back’ facility which allows all or part of the cost of shares acquired in one tax year to be treated as though the shares had been acquired in the preceding tax year. The SEIS rate for that earlier year is then applied to the shares, and relief given for the earlier year. This is subject to the overriding relief limit for each year. Note that there is no SEIS rate earlier than 2012 to 2013, so there is no scope for carrying relief back before that year.

Captial Gains Tax: reinvestment relief

This relief was originally only available for the 2012 to 2013 tax year but has been extended to 2013 to 2014 at half the rate. If you sold an asset and reinvested all or part of the amount of the gain in shares which also qualify for SEIS income tax relief, the amount reinvested may be exempted from Capital Gains Tax. If you sold an asset that would give rise to a chargeable gain in 2013 to 2014, and reinvest all or part of the amount of the gain in shares which also qualify for SEIS income tax relief, half of the amount reinvested may be exempted from Capital Gains Tax. Capital gains re-investment relief is subject to the £100,000 annual investment limit which applies for income tax relief. Thus for 2012 to 2013 gains of up to £100,000 may be exempted and for 2013 to 2014 up to £50,000. The latest date for making a claim for 2012 to 2013 is 31 January 2019 and, for 2013 to 2014, 31 January 2020.

The asset does not have to be disposed of first, the investment in SEIS shares can take place before the disposal of the asset, providing that both the disposal and investment take place in the same year.

If you make use of the ‘carry-back’ facility for the purposes of SEIS income tax relief note that any claim to reinvestment relief must match the year in which the shares are then treated as issued. If you are issued SEIS shares in 2013 to 2014, you may want to claim SEIS income tax relief as if all or some had been issued instead in 2012 to 2013. If you do so, the shares treated as issued in 2012 to 2013 are also treated as issued in 2012 to 2013 for the purposes of re-investment relief and you cannot claim re-investment relief on gains made in 2013 to 2014 in respect of those shares.

The Capital Gains Manual gives guidance on when an asset is disposed of for Capital Gains Tax purposes, starting at paragraph CG14250.

Example 1: Benjamin sells an asset in June 2012 for £200,000 and has a profit (before exemption) of £80,000. If he makes investments of only £20,000 in shares in 2012 to 2013, he can claim £20,000 of the profit is exempt from Capital Gains Tax and will need to pay on the remaining £60,000 profit. Allowable losses and Captial Gains Tax annual exempt amount can be set off against the remaining £60,000.

Example 2: Neela sells an asset in June 2013 for £200,000 and has a profit (before exemption) of £80,000. If she makes investments of at least £80,000 in shares in 2013 to 2014, and other conditions are met, she can claim that £40,000 (half of the gain) is free from Capital Gains Tax. She does not need to invest the whole £200,000 in order to get full exemption.

Capital Gains: disposal relief

If you have received income tax relief on the cost of the shares, and the shares are sold after they have been held for at least 3 years, any profit is free from Capital Gains Tax.

If no claim to income tax relief is made, then any other sale of the shares will not qualify for exemption from Capital Gains Tax.

Venture Capitial Schemes

The company can follow a share issue under SEIS with other shares under EIS, or investment from a Venture Capital Trust (VCT). It must have spent at least 70% of the monies raised by the SEIS share issue before issuing any more.

A company cannot issue shares under the SEIS scheme if it has already had investment from a VCT, or issued shares on an EIS compliance statement (EIS1).