UK: New Seed Enterprise Investment Scheme

Last Updated: 30 December 2011
Article by Amanda Solomon

Background

In the Autumn Statement on 29 November 2011 the Chancellor announced that the Government will introduce a new Seed Enterprise Investment Scheme ("SEIS") to encourage investment in new start-up companies. Subsequently, on 6 December 2011, the Government published a draft of Finance Bill 2012 that includes most (but not all) of the draft legislation concerning the SEIS.

The draft SEIS legislation is, of course, likely to be amended before it is enacted in Finance Act 2012. However, based upon the 6 December 2011 draft legislation, the key elements of the SEIS are outlined below.

Three new tax reliefs for individuals

The SEIS will provide individuals with up to three different tax reliefs.

Income tax relief for making the investment

The SEIS will provide a new income tax relief of 50 per cent for individuals who subscribe for new ordinary, non-redeemable shares in qualifying companies (see below).

Income tax relief at 50 per cent will be given whether or not the individual concerned pays 50 per cent income tax.

Each individual will have an annual investment limit of £100,000, but (provided the SEIS was in effect in the previous tax year) the individual can elect for some of the shares to be treated as acquired in the preceding tax year.

In principle, most individuals will be able to obtain tax relief under the SEIS. However, no tax relief will be available to:

  • A person who is, or is an associate of, an employee of the investee company (but for this purpose a Director of the company is not treated as an employee)
  • A person who has a "substantial interest" in the investee company. (This means, broadly, more than 30% of (i) the shares in the company, (ii) the voting power in the company or (iii) the assets of the company on a winding up).

The income tax relief cannot be claimed until the investee company has spent at least 70% of the money raised by the share issue for the purposes of the qualifying business activity for which it was raised and (in accordance with SEIS procedures) the investee company has issued a compliance certificate.

Capital Gains Tax exemption for disposal of qualifying shares

Capital gains subsequently realised by the individual on disposal of qualifying shares in the investee company will be wholly exempt from Capital Gains Tax ("CGT") provided the disposal occurs after the third anniversary on which the shares were issued by the investee company.

Tax relief for Capital Gains invested in SEIS

For the first year of the SEIS, i.e. the tax year beginning on 6 April 2012 and ending on 5 April 2013, there will be a one-off additional CGT relief for capital gains that are invested in the SEIS. In particular, a capital gain arising on the disposal of any kind of capital asset will be exempt from CGT if:

  • The capital gain arises on a disposal made on or after 6 April 2012 and before 6 April 2013
  • The capital gain is invested in new shares which are issued (fully paid up and wholly for cash) on or after 6 April 2012 and before 6 April 2013
  • The individual qualifies for income tax relief under SEIS in respect of that investment in new shares (see above), and
  • The new shares are held for at least three years after the date of issue.

The individual is not required to invest in the new shares the whole sale proceeds from the disposal: the capital gain will be fully exempt from CGT if only the capital gain is invested. For example, if an asset is sold for £200,000 and this realises a gain of £80,000, then the whole gain of £80,000 will be exempt from CGT provided the individual invests at least £80,000 in new SEIS-qualifying shares.

Further, the individual is not required to invest the whole capital gain, although in this case the CGT relief will be limited to that part of the gain which is invested in the new shares. Varying the above example, if only £20,000 of the £80,000 gain is invested in new SEIS-qualifying shares, then that £20,000 will be exempt from CGT, but the remaining £60,000 of the capital gain will remain subject to CGT (unless some other relief or exemption applies).

Which investee companies will qualify for SEIS?

As explained in the official Impact Assessment issued on 6 December 2011, the SEIS is intended to be focused narrowly upon "smaller, early stage companies carrying on, or preparing to carry on, a new business in a qualifying trade".

To achieve this narrow focus, there are numerous conditions, all of which must be satisfied, before a company can come within the SEIS. The relevant conditions include that:

  • The investee company must have been incorporated within two years ending on the date when the SEIS shares are issued. (This may discourage purchase of "off the shelf" companies from company formation agents)
  • The purpose of the existence of the investee company must be to carry on a trade which is a "genuine new venture"
  • The investee company must not control, or be under the control of, any other company
  • The investee company must not be a member of a partnership
  • The investee company must be an unquoted company
  • The investee company must have a UK permanent establishment
  • Immediately before the SEIS shares are issued, the gross assets of the investee company must not exceed £200,000
  • The SEIS shares must be issued wholly for cash and must be fully paid up at the time they are issued
  • At the time the SEIS shares are issued, the investee company must have fewer than 25 employees including Directors (although only the appropriate fraction of a part time member of staff is counted), and
  • No EIS investment or VCT investment has been made in the investee company on or before the day when the SEIS shares are issued.

A further significant restriction is that each investee company is subject to a cumulative investment limit, namely, that the total funds which it can raise from issuing SEIS shares is £150,000.

Tax anti-avoidance rules

As might be expected, the SEIS will be subject to numerous tax anti-avoidance rules, which comprise a substantial part of the draft SEIS legislation.

These rules, in some cases will:

  • Prevent SEIS relief being available at all in relation to the investee company (eg it has too many employees)
  • Prevent a particular individual investor from obtaining SEIS relief (eg the investor is an employee who is not a Director), and
  • Provide for the total or partial withdrawal of SEIS relief that has previously been given (eg if the SEIS shares are sold within three years of issue).

These extensive anti-avoidance rules are outside the scope of this summary note but, clearly, would need to considered carefully in each particular case.

Relationship between SEIS and the Enterprise Investment Scheme

An investee company that has raised funds through an issue of SEIS shares will be permitted subsequently to raise funds under the existing Enterprise Investment Scheme (EIS). The EIS rules will, however, be changed so that:

  • The investee company cannot issue any EIS shares until it has spent at least 75% of the funds it raised from the previous SEIS share issue, and
  • The maximum annual amount which the investee company is permitted to raise under the EIS will take into account funds raised under the SEIS.

Commencement and duration of the SEIS

Although, in due course, the life of the SEIS may be extended, it is currently intended that the scheme will apply for a five year fixed period, namely, to shares issued on or after 6 April 2012 and before 6 April 2017.

Comments

The new SEIS is of course welcome. It may be particularly attractive to one or more Directors of a start up company (and/or their families and friends) who wish to invest in the new company (provided the investor does not obtain more than the maximum permitted interest in the company).

The cumulative SEIS investment limit of £150,000 per company could prove to be something of a barrier to third party investors such as "business angels" however. In particular, given that almost all start up companies are very high risk investments, the third party investor will wish to undertake or commission appropriate due diligence before investing. If the total cost of that due diligence amounts to a substantial fraction of the total SEIS tax relief potentially available to the investor, then the whole investment may cease to be viable for the investor.

Hopefully, therefore, the Government may be persuaded to increase the cumulative per company limit significantly, perhaps to £500,000 or £1 million. If the cumulative limit is raised significantly, then:

  • the total cost of due diligence should become less of a barrier and
  • several investors investing together could each bear a faction of the costs

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.