Designed to complement the EIS, the Seed Enterprise Investment Scheme (SEIS) was launched in April 2012 with the aim of boosting entrepreneurship by helping small start-up companies to raise equity finance in the very early stages. The scheme is focused on smaller, early stage companies carrying on, or preparing to carry on, a new business in a qualifying trade.
Investors can obtain generous income tax and CGT breaks for their investment and companies can use the relief to attract additional investment to develop their business.
Income Tax Relief
Qualifying individuals are able to invest up to £100,000 into qualifying companies in a tax year, with income tax relief available at up to 50% of the sum invested. As under the EIS, unused relief in one tax year can be carried back to the preceding tax year if there is unused relief available for that year.
Capital Gains Tax (CGT)
A gain on the disposal of SEIS shares will be exempt from CGT as long as the shares obtained income tax relief, which has not been withdrawn, and are held for at least three years.
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.
To qualify under the SEIS, both the investor and the company must meet a number of conditions.
The investor, or someone who is connected with them, must not be an employee of the company in which the investment is being made (although they can be a director). In addition, investors must not hold more than 30% of any of the following (in either the company itself or a 51% subsidiary of the company):
- Voting rights
- Assets on a winding up
As the SEIS is intended to benefit new companies, the company must be unquoted and the trade must be a ‘new’ qualifying trade (less than 2 years old). The company must also have fewer than 25 full-time equivalent employees and net assets of no more £200,000 before any SEIS investment. The maximum amount that a company can attract in investment qualifying for SEIS is £150,000 in total.
James sells an investment property in the current tax year for £200,000, making a gain of £100,000. He invests £100,000 of the proceeds in new shares which qualify under the SEIS. He will be able to claim a reduction of £50,000 (being 50% of the amount invested in SEIS) in the chargeable gain on the shares. James also claims reinvestment relief of £14,000 (50% of £100,000 gain at 28% CGT) and £14,000 (remaining 50% of £100,000 gain at 28% CGT) is reclaimed on a previous gain from 2 years ago, taxed at 28%*. Note: the second £14,000 is only deferred until a chargeable event.
*Please note that the example above uses a CGT rate of 28% for a higher rate tax payer, incurred on the disposal of an investment property or carried interest. New rates of CGT were introduced from 6 April 2016 at 10% (previously 18%) for basic rate tax payers and 20% (previously 28%) for higher rate tax payers. These new rates do not apply to capital disposals involving investment property or carried interest.
In the second column, the company performs well and after three years, the company and James’ shares are acquired at a 50% gain, with James receiving £150,000. His gain of £50,000 is exempt from CGT as the shares have been held for at least three years. The £14,000 CGT previously deferred comes back into tax again at the current rate of CGT, unless the £50,000 is reinvested again into EIS or SEIS shares.
In the third column, the company performs badly and James’ shares are worthless after three years. James will receive £86,500 or 86.5% of his original investment of £100,000. The original £50,000 income tax relief and £14,000 reinvestment relief together with SEIS loss relief on his net cost of investment of £50,000 (£100,000 – £50,000 income tax relief) at 45% marginal income tax rate, assuming he is an additional rate taxpayer. So all in all, a net loss of £13,500 or 13.5% on his original investment of £100,000.