Seeding scheme is a draw
Introduced this year, the seed enterprise investment scheme has attractive tax reliefs for individual investors in qualifying companies
Finance Act 2012 introduced a new venture capital scheme, the seed enterprise investment scheme (SEIS), as part of the Government’s agenda of “helping smaller, riskier, early stage UK companies, which may face barriers in raising external finance, to attract investment”. Tax reliefs are available to individual investors who subscribe for shares in SEIS qualifying companies on or after 6 April 2012.
SEIS investors can claim income tax relief of 50% of the amount subscribed for shares, up to an annual investment limit of £100,000, provided that the shares are held for three years.
In addition, there are a number of generous capital gains tax (CGT) reliefs available to SEIS investors, including an exemption from CGT on disposal of the SEIS shares (provided the shares have been held for three years), and relief for losses on disposal (less any income tax relief already claimed).
There is also a CGT re-investment exemption, where gains realised from asset disposals in tax year 2012-13 are re-invested in qualifying SEIS investments in the same year, subject to a limit of £100,000.
By way of example, Andrew sells an asset in October 2012 and realises a chargeable gain of £100,000. He would ordinarily pay CGT at a maximum of 28%, i.e. £28,000. Rather than paying CGT on the gain, he decides to re-invest the gain by making a qualifying SEIS investment. Andrew subscribes £100,000 for SEIS shares which he sells in January 2016 for £150,000.
As Andrew re-invested the whole of his gain and it does not exceed the annual limit of £100,000, the whole of the £100,000 gain in 2012-13 is CGT exempt. He receives income tax relief of £50,000 in 2012-13. Andrew therefore receives a maximum tax benefit in tax year 2012-13 of £78,000 (78% of the £100,000 investment). In addition, when he disposes of his shares in 2015-16, the £50,000 gain is CGT exempt.
In order to qualify for the favourable tax reliefs, a number of conditions must be met by both the investor and the investee company. The conditions are relatively strict and extensive, in order to ensure that the relief is only available to small start-up trading companies. A few of the conditions are summarised briefly here, but it is recommended that advance assurance is sought to ensure any proposed investment is SEIS qualifying.
The conditions relating to the company include that it must:
- have a UK permanent establishment;
- not be under the control of another company;
- exist for the purpose of carrying on a qualifying trade, which must have commenced less than two years before the share issue date;
- have fewer than 25 full time employees (or part time equivalents); and
- have gross assets of no more than £200,000 immediately before the SEIS share issue.
The investor must not be an employee of the company, but can be a paid or unpaid director. Furthermore, the investor (and his/her associates) must not hold a substantial interest in the company, which is broadly 30% or more of ordinary or issued share capital, voting rights or rights to assets on a winding up.
A company can apply to HMRC’s Small Company Enterprise Centre for advance assurance that it is SEIS qualifying (HMRC have produced a proforma advance clearance form for companies to use).
The advance assurance procedure is likely to prove vital in assisting SEIS qualifying companies to attract investors, as it has done with other venture capital reliefs. Once the investment has been made, the company can then apply for a formal compliance statement. This may only be done once 70% of the money raised has been spent. SEIS investors must claim the relief no later than the fifth anniversary of the filing date for the relevant tax year.
Points to note
SEIS provides extremely favourable tax reliefs for investors, and it is worth noting a couple of practical points. First, SEIS is not available if there has been previous EIS or VCT investment in the company. However, EIS/VCT investment can be raised following an SEIS investment, but only once at least 70% of the SEIS monies raised have been spent.
Secondly, unlike some other CGT reliefs (including EIS deferral relief), in order for investors to benefit from SEIS CGT re-investment relief and to receive a maximum 78% tax relief (available in 2012-13 only), only the gain (and not the full proceeds of disposal) needs to be reinvested.
Christine Yuill, senior associate, Pinsent Masons LLP