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A Guide to: The Seed Enterprise Investment Scheme

In Summary

Heather Tulloch, Senior Manager/Consultant

heather.tulloch@ashcroftllp.com

7 September 2021

This is one of the most generous investment incentives ever introduced in the UK but the legislation is complex.

The tax reliefs available benefit the investor rather than the company - the benefit to the company is the ability to raise funds more easily

The maximum annual investment for income tax purposes is restricted to £100,000 so you can reduce your income tax liability by up to £50,000 for the year of investment.

The Seed Enterprise Investment Scheme (SEIS)

The Seed Enterprise Investment Scheme (SEIS) is aimed at providing tax relief for equity raised in riskier, smaller, early stage companies which are carrying on, or preparing to carry on, a new business. The scheme aims to help overcome the problems faced by such companies in raising small amounts of equity finance.

This is one of the most generous investment incentives ever introduced in the UK but the legislation is complex and many investors and companies disqualify themselves unknowingly. It is therefore vital to seek expert advice to ensure that the investment qualifies for the reliefs and to enable you to avoid the common pitfalls that could result in the tax relief being withdrawn.

The incentives

As the scheme is designed to incentivise investors and the tax reliefs available benefit the investor rather than the company. The benefit to the company is the ability to raise funds more easily, or to raise more funds, than would have been possible if the investment did not qualify for EIS relief.

The tax incentives to the investor are three fold – there is an immediate reduction in income tax and the potential to exempt capital gains in the year of investment and there is also beneficial treatment of any eventual capital gain on the sale of the shares.

Income Tax relief

A deduction against your income tax liability of 50% of the investment is given to investors who subscribe for new ordinary shares in qualifying companies, provided that the shares are retained and the company continues to qualify for at least three years.

The maximum annual investment for income tax purposes is restricted to £100,000 so you can reduce your income tax liability by up to £50,000 for the year of investment.

SEIS subscriptions can also be carried back to the previous tax year, subject to the above investment limit for the prior period

Exemption of existing capital gain

In addition to the SEIS income tax relief 50% of a gain arising on any other capital disposal can be exempted from CGT (subject to the £100,000 investment limit) leaving only 50% of the gain taxable.

The capital gain must arise in the same year as the income tax relief is claimed for this relief to be available.

CGT exemption on sale of SEIS shares

No capital gains tax (CGT) is payable on the disposal of SEIS shares that are held for more than three years provided the income tax relief was claimed at the time of the investment. If a loss arises on the disposal of the shares, the balance of the loss (i.e. after deducting the initial 50% income tax relief) can either be claimed as a capital loss or be offset against general income for the year.

The conditions

Given the generous tax reliefs available it should come as no surprise that there are a number of conditions that must be satisfied for the above incentives to be available. The company needs to qualify before the share issue and for the following three years.

Qualifying companies

Qualifying companies must carry on “qualifying activities” (broadly, and subject to various limitations and exclusions, commercial trading activities). Unfortunately not all trades qualify for SEIS relief. Generally speaking, you can’t get tax relief for shares in property investment or dealing companies, businesses in the financial sector and other asset-based businesses. Some of the excluded businesses are:

  • Dealing in shares or other financial instruments
  • Leasing or hiring
  • Property development/investment
  • Farming
  • Owning and operating nursing and residential care homes or hotels
  • Any form of renewable and non-renewable energy generating activity

The company must remain independent (that is, not under the control of any other company) and cannot be listed on a recognised stock exchange, nor can arrangements be in place for the company to become listed. For these purposes, a listing on AIM is not treated as a quotation.

The company (or group) must have gross assets not exceeding £200,000 immediately before the issue of the SEIS shares, and can have no more than 25 full-time employees at the time of the issue of the shares.

The trade being carried on by the company at the date of issue of the SEIS shares must be less than two years old at that date. This condition applies whether the trade was first begun by the company, or whether it was first begun by another person who then transferred it to the company.

There must be a genuine risk to capital – an investment that is considered by HMRC to be tax–motivated will be excluded from relief. This applies where the investment is structured to provide a low risk of return for investors.

Qualifying investors

As the investor, you must not be “connected” with the company.

You are connected with the company if you or your associates (broadly close family members and business partners) hold a total of more than 30% of the ownership of the company, or are employed by the company or any subsidiary (although there is an exemption for directors who have never been employees).

Qualifying shares

The shares must essentially be the lowest ranking shares in issue. They must not be, for example, preference shares.

As an investor, you will not be eligible for SEIS if you already hold shares in the company – unless your existing shares were themselves SEIS shares or, in limited circumstances, subscriber shares.

Limits on the amount raised

There is an overall cap of £150,000 on funds raised under SEIS and the company may not have raised any capital under EIS or venture capital trusts.

How the funds are used

The funds raised must be used within three years.

Monies raised by a share issue are not regarded as being spent for a qualifying  business activity if they are used to buy shares or stock in a company. This does not prevent the issuing company from investing the monies in a subsidiary, providing that the monies are thereafter used by a 90% subsidiary for the purposes of a qualifying business activity.

Withdrawal of SEIS relief

HMRC can withdraw the relief if the qualifying conditions cease to be met within three years of the issue date of the shares, or three years after the company’s trade started.

This means it is important for you to continue monitoring the activities of the company after making the qualifying investments.

There are other situations in which SEIS relief will be withdrawn. One of these is if the investor “receives value” from the company either after the shares are issued or within one year before the share issue.  “Receiving value” is widely defined but would include the repayment of any loan made before the shares are issued. Thus the common situation of a potential investor lending money to a company to tide it over, pending agreement of investment terms, will cause loss of relief if the loan is subsequently repaid.

How we can help

The above is a broad summary of the major points of the legislation but the law contains a number of detailed terms and conditions and we would always recommend that professional advice was sought before investing or implementing a scheme.

It is possible to seek advance assurance from HMRC that a share issue will meet the conditions for SEIS – this reassures the potential investors that the tax reliefs will be available and is common practice.

Ashcroft can advise on the eligibility of businesses for SEIS schemes and, where required, assist with obtaining HMRC Advance Assurance. We also help businesses and owners ensure that their plans do not jeopardise the SEIS eligibility of the company.

We can also assist with the administration requirements of issuing EIS shares and ensure that the process runs smoothly for the company and the investors.

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