The SEIS Scheme
The SEIS scheme, otherwise known as the seed enterprise investment scheme, is one of four venture capital schemes designed to help small companies to raise money when they begin to trade. SEIS tax relief is offered to individual investors, who then buy new shares in the company. For investors to claim and keep the SEIS tax relief related to their shares, there are a variety of rules that must be followed.
SEIS tax relief of up to 86.5% * is available for investments in new small companies under the Seed Enterprise Investment Scheme (SEIS). However, as SEIS applies to high investment risks, it’s imperative to note that the SEIS scheme will not suit all investors. The seed enterprise investment scheme is similar to the existing Enterprise Investment Scheme (EIS), but targeted at companies whose trade is not more than two years old and have not carried out any other trades previously.
Introduced in 2012 by HMRC, the SEIS scheme provides a number of tax reliefs for investors, including automatic reductions and capital gains avoidance. However, this can depend on your tax bracket, so be aware of the bracket you are in. [* Assuming CGT at 28% and highest rate income tax]
SEIS Tax Relief
There are currently five SEIS tax reliefs:
- Income Tax Relief– Investors will benefit from income tax relief on the amount invested at 50%, regardless of the rates at which they actually pay tax on their income, up to a maximum annual investment of £100,000. The shares must be held for at least three years from the date of issue or the relief will be withdrawn.
- Capital Gains Tax Reinvestment Relief– The relief will take the form of a 50% exemption from CGT where an individual realises a gain and invests the gain into qualifying SEIS shares. There is no limitation on the type of asset that may be disposed of. The £100,000 investment limit which applies for income tax relief also applies for reinvestment relief. Please note that the investment in SEIS shares can take place before disposal of the asset. This is a full exemption rather than the deferral of CGT that is available under the EIS. Previously the availability of this relief was only temporary, but the 2014 Budget made the capital gains tax relief for re-investing chargeable gains in SEIS shares permanent.
- Capital Gains Tax Exemption– This works in exactly the same way as for EIS investment on profits made after the shares have been held for over 3 years and income tax relief has not been withdrawn.
- Loss Relief– This works in the same way as for Enterprise Investment Scheme investments save for the fact that as the income tax relief is increased under SEIS, the overall investment protection is 72.5p in the £1 for a 45% tax payer if the investor realises a total loss and has not reinvested capital gains.
- Inheritance Tax Exemption– This is the same as for EIS investments.
How Does The SEIS Scheme Work?
The company’s gross assets before issue of the seed enterprise investment scheme shares must be not more than £200,000 and the number of its full-time equivalent employees must be less than 26. The company must have a permanent establishment in the UK and not have benefited previously from EIS or Venture Capital Trust (VCT) investment. Directors, but not employees, will be able to invest in their own companies provided they own less than 30% of the company’s shares.
To comply with the European Commission’s state aid rules, the company must meet a ‘financial health requirement’ at the time the shares are issued; an SEIS scheme investment cannot be used to rescue a company in difficulty. A company will be able to raise up to £150,000 in total. There must be no prearranged exit for investors and the company’s trade must be a genuinely new venture. The seed enterprise investment scheme will last five years.
Which Companies Can Use The SEIS Scheme?
Providing that your company complies with the following, your business can use the SEIS scheme:
- If your company hasn’t been controlled by another company since it was incorporated.
- It was established in the UK.
- If your company carries out a new qualifying trade.
- Your company isn’t trading on a renowned stock exchange at the same time of the share issue.
- At the time of the share issue, the company isn’t looking to become a subsidiary or quoted company.
- The company doesn’t controls another company, unless the company is a qualifying subsidiary.
If you would like more information about the SEIS scheme, don’t hesitate to contact our team at CSS Partners.