UK: Seed Enterprise Investment Scheme

Last Updated: 19 November 2013

The Seed Enterprise Investment Scheme (SEIS) is designed to help small, early-stage trading companies to raise equity finance by offering a range of tax reliefs to individual investors who subscribe for and purchase new shares in those companies. It compliments the existing Enterprise Investment Scheme (EIS) which will continue to offer tax reliefs to investors in higher-risk small companies.

SEIS is intended to recognise the difficulties faced by companies in attracting investment during their early stages by offering tax relief at a higher rate than that offered by the existing EIS. The qualifying conditions for SEIS are similar to, but more restrictive than those of EIS. For more details about EIS please see our separate briefing note on EIS.

Tax reliefs available

The main tax benefits for investors include:

  • Income tax relief of up to 50% on the amount invested in qualifying investments of up to £100,000, giving a maximum tax deduction of £50,000 in any one year providing the individual has a sufficient income tax liability.
  • If the investor holds the SEIS shares for at least three years, any capital gain arising upon disposal will be exempt from capital gains tax.
  • If the SEIS shares are disposed of at a loss, the individual can elect for the amount of the loss (less any income tax relief given) to be set against total income or other capital gains.
  • UK resident investors can defer capital gains made in 2013/14 on the disposal of any asset by reinvesting the gain into shares of an SEIS qualifying company. Gains reinvested into SEIS shares will qualify for a 50% exemption from CGT. The investment limit of £100,000 also applies for reinvestment relief.
  • For inheritance tax purposes, SEIS investments qualify for 100% Business Property Relief once they have been held for two years.

Example

Mr A has chargeable gains of £100,000 and income of £200,000 in the 2013/14 tax year.

If Mr A subscribes for and purchases £100,000 worth of qualifying SEIS shares:

  • chargeable gains of £50,000 will be deferred (until the sale of the SEIS shares); and
  • he will be entitled to claim income tax relief of £50,000 (£100,000 x 50%).

General requirements regarding issue of shares

  • All shares must be subscribed for wholly in cash and fully paid up at the time they are issued. The shares must be non-redeemable ordinary shares, which do not carry preferential rights to the company's assets in the event of a winding up.
  • A company is not allowed to raise more than £150,000 in total through SEIS and there can have been no previous EIS or Venture Capital Trust (VCT) investment in the company.
  • The money raised by the share issue can be used either for the purpose of an existing qualifying trade or for the purpose of preparing to carry on such a trade. Alternatively, the money raised can be used to carry on research and development intended to lead to a qualifying trade being carried on.
  • The money raised by the share issue must be employed for the purposes of the trade or research and development within three years of the shares being issued.
  • There should be no pre-arranged exit for the investor.
  • The shares must be issued for genuine commercial reasons, and not as part of a tax avoidance scheme or arrangement.
  • A SEIS Investor can only claim the relief once the company has either spent at least 70% of the money raised or been actively trading for at least 4 months.

Investor requirements

In order to qualify for the reliefs, a SEIS investor must not be "connected" with the company. An investor will be connected with the company if:

  • The investor and his associates' interest in the company exceeds 30% of the company's share capital, voting rights or assets on a winding up; or
  • The investor or any of his associates is an employee of the company. However, there is no restriction in respect of being a director of the company.

Company requirements

In order for investors to be able to claim, and maintain, the various SEIS tax reliefs relating to their shares, the issuing company must meet the following conditions for the period beginning with the issue of the shares and generally ending three years after the date of the issue:

  • The company must be an unquoted company at the time the shares are issued. For SEIS purposes, shares listed on AIM are unquoted.
  • The company must not have been a 51% subsidiary of another company or been under the control of another company since the date of incorporation.
  • The gross assets of the company (or group) must not exceed £200,000 immediately before the share issue.
  • The company (or if it is a member of a group, the group) must have fewer than 25 full-time employees, or their equivalents, at the time the shares are issued.
  • The company must exist wholly for the purposes of carrying on one or more qualifying trades, or be a parent company of a trading group.
  • The company must have commenced trading less than two years before the share issue.
  • The trade must be carried on on a commercial basis and with a view to the realisation of profits and must not at any time consist wholly, or substantially, in the carrying on of "excluded activities".
  • The company must have a permanent establishment in the UK or be resident in the UK.
  • The company must not be in financial difficulty.

Excluded activities

Excluded activities include:

  • dealing in land
  • banking or financial services
  • professional services
  • leasing
  • property development
  • receiving royalties or licence fees (unless substantially deriving from Intellectual Property created by the company or group)
  • operating or managing hotels or nursing homes

Advance assurance scheme

HMRC operates an advance assurance scheme for SEIS, whereby companies can submit their plans to raise money, together with details of the company and its (proposed) trade, before issuing shares. HMRC will advise on whether or not the proposed share issue is likely to qualify.

It is important that professional advice is taken to maximise the chances of success, which Verfides can assist with.

Summary

The Seed Enterprise Investment Scheme (SEIS) is designed to help small, early-stage trading companies raise finance by offering a range of tax reliefs to investors who subscribe for and purchase new shares in those companies.

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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