The Government introduced the new Seed Enterprise Investment Scheme (SEIS) for shares issued after 5 April 2012, to encourage investment in small start-up companies. This scheme can be attractive to investors by offering generous tax reliefs for qualifying investments.

Tax breaks available under the scheme

  • Up-front income tax relief of 50% for subscriptions of shares by investors (with carry back facility to the previous tax year).
  • No capital gains tax on the disposal of scheme shares which are held for more than three years.
  • An exemption from CGT is available for disposals of assets made in 2012/13 (100% of the gain) and 2013/14 onwards (50% of the gain), where the gain is reinvested in SEIS qualifying shares in the same tax year (or treated as so invested using the carry back facility).

In order to be eligible for the scheme, the investment, the company and the investors need to meet certain conditions and, as with the Enterprise Investment Scheme (EIS), there are numerous anti-avoidance rules.

Care should therefore be taken and professional advice sought by investors before making investments which they would wish to qualify under the scheme.

Some of the main company conditions

  • The company's qualifying trade must not be more than two years old.
  • The same exclusions from 'qualifying trade' as for the EIS, e.g. leasing, property development, etc.
  • The company must not be under the control of another company (ignoring any 'on the shelf period' for shares issued on or after 6 April 2013).
  • The company must have a permanent establishment in the UK.
  • The company must have fewer than 25 full-time employees at the time of the investment.
  • The company must have gross assets of less than £200,000 at the time of the investment. " The company will be able to raise a total of up to £150,000 under the scheme (total and not an annual limit).
  • Once 70% of SEIS funds have been utilised, the company may raise further funds under the enterprise investment scheme or from venture capital trusts.

Some of the main investor conditions

  • Annual investment limit of £100,000.
  • Directors can qualify but employees cannot.
  • No substantial interests in the company (broadly interests greater than 30%).

The SEIS is a welcome development which enhances the tax reliefs available for equity investments in smaller companies. The main limiting factor from the perspective of the company seeking investment is that the amount it can raise under the scheme is limited to £150,000. A larger limit would have made a more meaningful difference to the funding options for small companies.

Our Seed Enterprise Investment Scheme Specialists

Our team has extensive experience in advising both companies and investors on their eligibility under venture capital schemes. They have advised on fund raisings by single companies, by approved and unapproved EIS funds and venture capital trusts.

We have taken great care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014.