UK: Seed Enterprise Investment Scheme (SEIS)

Last Updated: 15 February 2012
Article by Smith & Williamson

Introduction

Following a July 2011 consultation which closed on 28 September 2011, the Government put forward proposals and draft legislation published on 6 December 2011 to implement tax incentives for investment in small, potentially risky early stage UK companies who may otherwise experience barriers to raising external finance. The scheme provides for SEIS investors to receive income tax relief for investment on a similar basis to the now familiar Enterprise Investment Scheme (EIS). For the 2012/13 tax year only there is also an exemption from CGT for gains realised on any asset on a £ for £ basis, where the gains, or some of the gains, are invested in SEIS, for which draft legislation is expected to be available before the March 2012 Budget.

As with EIS there are conditions and limits, and this note sets out the basic terms on which relief is available.

Income tax relief

For investment in qualifying shares issued on or after 6 April 2012, investors meeting the relevant conditions will be able to claim a reduction in income tax equal to 50% of the amount invested. The relief (reduction in tax) can be claimed against the current year's income tax liability or against the previous year's income tax liability according to what is specified in the claim.

Limit of relief and investor conditions

The maximum investment amount on which income tax relief (reduction in tax) can be claimed will be £100,000 per tax year. This means the maximum amount of relief will be £50,000. It is possible to use this against an income tax liability of the current year, or the previous year, however this carry-back facility will not be available for the 2012/13 tax year. From 2013/14 onwards and considering SEIS relief only, it may be advisable to claim for offset against the previous year, to preserve the current year's income tax relief capacity for a potential carry back claim of the following year.

The investor must meet the following conditions during the period from incorporation of the company to the third anniversary of the date on which the shares were issued:

  • No investor, nor any associate of the investor, can be an employee of the issuing company unless they are also a director;
  • The investor must have no substantial interest in the issuing company. Substantial interest means either (i) 30% of the ordinary share capital or issued share capital or voting power of the company, or (ii) rights entitling the individual to receive more than 30% of the assets available to equity holders on a winding up of the company, or (iii) control of the company. A holding of subscriber shares when no other shares have been issued and the company has not begun to or is not preparing to trade is ignored for the purposes of this test.

The investor can only claim SEIS relief when at least 70% of the money raised from the qualifying share issue has been spent for the purpose of the qualifying business activity, and cannot be made more than five years after the normal self assessment filing date for the tax year in respect of the claim. The company must have issued a compliance certificate to the investor, but can only do so once it has spent 70% of the funds raised for the purpose of the qualifying business activity, and obtained permission from an HMRC officer. The condition requiring 70% of funds to be spent does not have to be met before the end of the tax year for which relief is claimed. If the money is not spent until some time after (but before five years after the normal self assessment filing date for the tax year in respect of the claim), there will still be time to make the claim for relief. There is no requirement to submit this certificate with the individual's self assessment return. The company is also obliged to issue a compliance statement to HMRC in respect of the share issue.

Any relief given can be clawed back if a disqualifying event occurs or the company or investor fails to meet the required conditions. While the investor must hold the shares for three years from the date of issue, a transfer of the share to a spouse or civil partner during the investor's lifetime does not count as a disposal for this purpose.

Qualifying conditions with respect to the share issue

The shares must be ordinary shares which, during the three year period from issue, do not carry any present or future preferential right to dividends, any present or future preferential right to assets on a winding up, or any present or future preferential right to be redeemed.

The shares must be subscribed for wholly in cash, fully paid up at the time of issue and must be held by the investor for three years from the date of issue. The issue must raise funds for the purpose of a qualifying business activity carried on or to be carried on by the issuing company and the funds raised must be spent (or all but an insignificant amount) for the purpose of that qualifying activity within three years of the date of issue.

There are other conditions as follows:

  • there can be no pre-arranged exit arrangements;
  • the shares must be issued for genuine commercial reasons and not part of a scheme the main purpose or one of the main purposes of which is tax avoidance;
  • the funds must not be used to benefit the investor or connected person;
  • a business cannot be artificially split so that the part split off comes within the requirements for the relief, but in effect continues to be part of the original business;
  • the share issue cannot take place later than two years after the incorporation of the company.

Qualifying conditions with respect to the company issuing the shares

During the period of three years from the date of the qualifying issue of shares the company must meet the following conditions:

  • The company must exist for the purpose for which the shares were issued (unless failure is caused by the company going into administration or being wound up for genuine commercial reasons);
  • the company must carry out the relevant new qualifying trade, preparatory work or research and development, rather than any other person connected with the issuing company;
  • the company must have a UK permanent establishment;
  • at the date of issue of the shares, the company must not "be in difficulty" as defined for the purposes of EU State Aid rules (2004/C244/02);
  • at the date of issue of the shares the company must be unquoted and there can be no arrangements for the company to cease being unquoted (an AIM quoted company is regarded as unquoted for this purpose);
  • the issuing company cannot control another company between the date of incorporation and three years after the date of issue of the shares. Neither can the issuing company be under the control of another company in this period;
  • the issuing company cannot be a member of a partnership (whether LLP or other type of partnership);
  • the value of the company's assets (excluding liabilities), together with the proportion of any related company's gross assets, must not exceed £200,000 immediately before the qualifying issue;
  • the number of full time working employees, together with the appropriate proportion of such employees of any related company, must be less than 25;
  • the company cannot have raised EIS or VCT money prior to the SEIS share issue;
  • the maximum that can be raised by the company is £150,000 (this is not an annual limit).

Once 75% of the funds raised from SEIS have been spent for the qualifying business activity, the company may raise further funds under the EIS scheme or from VCTs.

Qualifying business activity

The qualifying trade requirement is the same as for the main EIS rules, and excludes dealing in land, commodities or futures, property development, leasing, receiving royalties or licence fees (in certain circumstances), farming, legal or accountancy services amongst other activities. A new qualifying trade must be a "genuine new venture", and there is further definition in the draft legislation of what this means in respect of trades previously carried on or transferred from another person as a result of arrangements.

A qualifying activity does not include the acquisition of shares in a company.

CGT consequences of owning SEIS shares

Gains on SEIS shares are exempt from CGT, if held for at least three years from the date of issue. If a loss is realised on their disposal, the loss for CGT purposes is reduced by the amount of any SEIS relief claimed.

If SEIS shares are exempt from CGT in what circumstances can you get loss relief?

CGT exemption in respect of funds used for SEIS subscription (SEIS reinvestment relief)

There will be an exemption from CGT on a £ for £ basis where an individual realises gains in the tax year 2012/13 (6 April 2012 to 5 April 2013), and the amount of the gain or any part of it is used for SEIS investment. The relief will be available only to individuals and not to other persons, such as companies or the trustees of settlements.

The relief will have to be claimed.

Outline of qualifying conditions

To be entitled to the exemption the individual will have to make a qualifying disposal and a qualifying investment (or one or more qualifying investments) in the tax year 2012/13.

Qualifying disposal

The individual must dispose of an asset in 2012/13 and the gain must arise on that disposal. There is no limitation on the type of asset that may be disposed of. All types of disposal, including part disposals, will qualify.

Qualifying investment

The individual must invest in shares issued on or after 6 April 2012 and before 6 April 2013 in respect of which they receive income tax relief under SEIS. The time limit for claiming SEIS re-investment relief is the same as for SEIS relief from income tax. Despite there being a requirement that SEIS relief must be obtained in order for a claim to SEIS re-investment relief to be obtained, the claim for SEIS re-investment relief can be made before SEIS relief is obtained. The shares must be subscribed for wholly in cash, fully paid up at the time of issue, and held for 3 years. If income tax relief is not due the CGT exemption will not be available.

To qualify for exemption from CGT on the whole of the gain on the disposal of the asset, the individual will have to invest the full amount of the gain in SEIS shares. It will not be necessary to invest the full proceeds from the disposal of the asset. If only part of the gain is invested partial relief will be available.

What if shares acquired in 2012/13, but 70% of funds not used by 5 April 2013?

Failure to meet qualifying conditions

For complete exemption of a gain, the individual must hold their qualifying investment throughout the 3 year qualifying period for full SEIS income tax relief. The individual, and the company, must continue to meet the conditions that apply during this period. In particular, neither the individual nor any connected person may receive any value from the company during this period. (This does not include receipt of ordinary commercial payments such as dividends or reimbursement of expenses to a director). There must be no loss of income tax relief in respect of the SEIS shares in that period. Where some or all of the income tax relief is lost a corresponding proportion of the CGT exemption will also be lost.

There will be an exception where an individual transfers the SEIS shares to their spouse or civil partner during the three year qualifying period. Provided all other conditions continue to be met during the remainder of the qualifying period, such transfers will not lead to a failure to meet the qualifying conditions.

Where a gain has initially qualified for exemption and subsequently an event occurs which means that any qualifying conditions for SEIS income tax relief cease to be met, the amount that was previously exempt will be liable to CGT. For example, if, during the period of three years following the issue of the shares, the company comes under the control of another company then, even if the individual has not disposed of any of their shares, the company (or the particular issue of shares) ceases to qualify, any income tax relief given must be repaid. In such a case any CGT relief will also be withdrawn.

In some circumstances income tax may be only partially withdrawn. For example, if the individual receives value from the company, only a proportion of the income tax relief may be withdrawn. Where a partial withdrawal of income tax relief applies there will be a corresponding partial withdrawal of the CGT relief."

Draft legislation for SEIS re-investment relief was published on 31 January 2012.

Please Note

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice.

You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents.

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.

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