The Seed Enterprise Investment Scheme (SEIS) is one of four venture capital schemes and is designed to help small, early-stage companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies.
The rules of the Seed Enterprise Investment Scheme (SEIS) have been designed to mirror those of the Enterprise Investment Scheme (EIS), as it is anticipated that companies may want to go on to use EIS after an initial investment under SEIS.
The main features of an SEIS scheme are as follows:
How the scheme works
- A maximum of £150,000 can be received through SEIS investments in any 3 year period. This will include any other state aid received in the 3 years prior to and including the date of the investment.
- The £150,000 will count towards any limits for later investments through other venture capital schemes, such as EIS.
- There are a number of rules which must be followed so that your investors can qualify for the reliefs available. The reliefs will be withheld or withdrawn from the investors if the rules are not abided by for at least 3 years following the investment.
Money raised by the scheme
- The money raised by the new share issue must be used for a qualifying business activity, which is either; a qualifying trade, preparing to carry out a qualifying trade, research and development that is expected to lead to a qualifying trade.
- The investment cannot be used to buy shares, unless the shares are in a 90% qualifying subsidiary that uses the money for a qualifying business activity.
Qualifying to use the scheme
- In order to qualify to use the scheme, the company must have a permanent establishment in the UK and must not be floating on the stock exchange or have plans to do so.
- The company must not control another company other than qualifying subsidiaries.
- The company must not be controlled by another company or have been at any point since incorporation.
- The company must be carrying out a new qualifying trade, where new is less than 2 years old.
- The company and its qualifying subsidiaries must not have gross assets worth more than £200,000 when the shares are issued.
- The company must not be a member of a partnership and must have less than 25 full-time equivalent employees when the shares are issued.
- If investment has been received via EIS or from a venture capital trust, SEIS cannot be used.
- The investor must not be an employee of the company, although they can be a director. The individuals’ stake in the company cannot exceed 30%.
Issuing shares
- Any shares issued must be paid up in full, in cash when they are issued.
- Shares must not be redeemable or carry any special rights to assets.
- Limited preferential rights to dividends are allowed, although the rights can’t allow dividend to accumulate or be varied.
- The maximum an individual can invest through SEIS in any tax year is £100,000.
The reliefs
Income tax relief
- The investor need not be UK resident but must have a UK income tax liability against which to set the relief. The share must have been held for at least 3 years from the date of issue for the relief to be retained. If the shares are disposed of before the three year period or if any of the qualifying conditions are breached, relief will be withdrawn.
- The income tax relief takes the form of a reduction equal to 50% of the amount of the subscription, or if that amount exceeds the liability, then the relief will be whatever amount it takes to bring the liability to nil.
- SEIS investments can be carried back to the preceding tax year, providing the limit for that year is not exceeded.
Capital Gains Tax relief
- Investors who have received income tax relief on the cost of the shares, and the shares are disposed of after they have been held for the qualifying period of 3 years, will be exempt from capital gains tax on any profit made on the SEIS investment.
- CGT exemption may be restricted if income tax relief is not given on the full amount of the subscription for SEIS shares or the amount of income tax relief is reduced or withdrawn in full.
Share Loss relief
- If the shares are disposed of at a loss, investors can elect that the amount of the loss, less any income tax relief given, can be set against income of the year in which the shares were disposed of, or any income of the previous year, instead of being set off against any capital gains.
Capital Gains Reinvestment relief
- If an individual disposes of an asset that would give rise to a chargeable gain and reinvests all or part of the amount of the gain in shares which qualify for SEIS relief, half of the amount reinvested may be exempt from capital gains tax.
- Reinvestment relief may only be claimed by individuals and not by companies or trustees.
Please contact Brian Jukes, our specialist for share incentive plans, EIS and SEIS
