Tax efficient investment – what is SEIS and who qualifies?

What is SEIS (Seed Enterprise Investment Scheme)?

SEIS offers substantial tax reliefs to investors in early stage companies which may find raising finance difficult. SEIS is aimed at individuals looking to invest in business start-ups, and offers very attractive tax reliefs, but the devil is in the detail. It is important to have a good understanding of the rules as outlined below.

Who is SEIS aimed at?

The company:

The company must be an unquoted trading company with a permanent establishment in the UK and not carry on any prohibited trades. Prohibited trades include financial trades, farming, market gardening, hotel and property development, but the actual list is much more extensive.

• Immediately before the share issue, the total value of the company’s assets must not exceed £200,000.
• The company must employ fewer than 25 full-time equivalent employees (working at least 35 hours per week).
• The company may not have received any investment under the EIS or VCT scheme at the time of the issue of the SEIS shares.
• The maximum amount a company can raise from SEIS investment is limited to £150,000 (this takes into account State Aid received by the company (such as grants) in that period) .
• The money raised by the issue of SEIS shares must be used for the qualifying trade within three years of the issue of the shares.
• The qualifying activity must be a new trade which must not be more than two years old.

The investor:

• The investor, together with their associates, cannot be connected with the issuing company. The investor is connected with the company if he or their associate is an employee of the company during the 3 year period beginning with the share issue. The investor is also connected with the company if he together with their associate hold or are entitled to acquire more than 30% of the share capital in the period beginning with incorporation and ending 3 years after the share issue.
• A director is not treated as an employee for the SEIS purposes, however if the director holds more than 30% of the share capital or voting rights he will be connected.
• There is no restriction on existing shareholders claiming SEIS relief.
• The investor must own the shares for at least three years otherwise the income tax reducer is withdrawn.
• There must be no loans to the investor or their associate linked to the subscription in the period beginning with incorporation and ending 3 years after the share issue
• Maximum subscription is £100,000.

The shares:

• The shares must be ordinary shares throughout the three year period.
• The shares must be subscribed wholly in cash and be fully paid up at the time they are issued.
• The shares must be issued to raise money for the purposes of a qualifying business activity.

‘Qualifying business activity’ means:

• carrying on or preparing to carry on a new qualifying trade
• carrying on research and development, which must either be carried on when the shares are issued or be commenced immediately afterwards, and which the company intends should benefit or lead to a new qualifying trade.

Income Tax Relief:

Maximum subscription for the investor is £100,000.

Relief is given as a tax reduction against the overall liability for the tax year of the investment (or the preceding year), meaning that on a £100k investment, £50k may be offset against an investor’s annual tax liability.

Investors can carry back the SEIS subscription to the previous tax year provided the limit for that year is not exceeded.

Other tax advantages:

• CGT relief – If the shares are disposed of after 3 years and income tax relief has been claimed, the gain might be exempt from CGT.
• SEIS re-investment relief – If the individual realises a chargeable gain and reinvests it in SEIS qualifying shares, 50% of the re-invested gain may be exempt from CGT.
• Share loss relief – A capital loss on the disposal of qualifying shares can be used against income in the year of disposal or the preceding year.
• IHT BPR relief – SEIS investments should qualify for IHT Business Property Relief after 2 years.

Not sure how to proceed with SEIS?

That’s understandable, it’s complicated. Fortunately, we have years of experience dealing with SEIS claims, and supporting our clients to prepare for their share issue, so it’s a simple decision to ask us for help. Give us a call or send us your enquiry.