SEIS – Seed Enterprise Investment Scheme
SEIS (Seed Enterprise Investment Scheme) was launched in April 2012 and provides a unique opportunity for individuals to invest in small start-up companies whilst benefiting from significant tax savings. The SEIS investment scheme was formed to boost growth in the UK economy by encouraging entrepreneurship and investment in new businesses. SEIS will only be in place for a limited time period of 5 years and will end in April 2017.
Below is a brief summary to explain what the benefits and limitations of SEIS are:
What is SEIS?
The Seed Enterprise Investment Scheme (SEIS) was created to encourage investment in small and start-up businesses in UK in order to drive economic growth and allows investors to benefit from substantial savings in tax. The funds invested via SEIS will receive up to 78% tax relief. These savings are split as 50% personal Income Tax relief on the funds invested and up to a further 28% Capital Gains Tax relief.
SEIS was first introduced by Chancellor George Osborne in 2011 and detailed the concept to provide significant incentive to invest in start-up businesses. The scheme was officially launched from 6th April 2012 and allows businesses to raise a total of up to £150,000 in funding.
Below is a brief summary of the key points related to SEIS:
- Tax savings for Investors are up to 50% of the funds invested, up to a maximum of £100,000 investment per individual investor, per tax year. This saving can be divided between the tax year of the investment and the previous tax year.
- The investment is exempt from Capital Gains Tax (CGT) resulting from any proceeds of sale related to a SEIS investment. This can result in a further saving of up to 28% tax relief.
- A company cannot raise funds via SEIS if it has received prior funding via the other government schemes of Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT). However, if a business raises funds via SEIS, they can raise additional funding via EIS or VCT in the future, as long as the business has used at least 75% of the SEIS funds raised.
- The tax savings of up to 78% make the SEIS investment scheme one of the most compelling and attractive tax relief schemes currently available in the UK.
If you would like more information on SEIS, please visit the comprehensive details available on HMRC website or feel free to call us to discuss your options.
How does SEIS work?
SEIS allows investors to provide funding by purchasing qualifying shares in a company. The investment attracts tax relief for individual investors through both Income Tax and Capital Gains Tax savings.
SEIS has been created to complement EIS and VCT structures and is intended to be part of fundraising (e.g. SEIS could be used prior to the utilization of EIS funding).
Below is a brief outline to explain how SEIS works for investors and start-up businesses seeking additional funding:
- Individuals investing via SEIS can invest up to a maximum of £100,000 per person, per tax year. This investment can be in one business or spread across multiple companies.
- Investors can receive tax savings of up to 50% of the funds invested in personal Income Tax relief, irrespective of their own marginal tax rate.
- Any business gaining investment via the scheme has a maximum amount of £150,000 in total funding available via SEIS investment.
- The business must have a permanent establishment in the UK and be in trade no more than two years.
- The business must have less than 25 employees (if the business is part of a group, this figure applies to the total number of employees in the whole group).
- The total assets in the business must be less than £200,000 in value.
- The business must trade within an approved sector, which normally excludes Finance or Investment.
What are the limitations of SEIS?
SEIS has many benefits and can result in significant tax savings. However there are a number of limitations and restrictions to be aware of before you consider raising funding or investing via the scheme. A few key points are set out below:
Restrictions for investors:
- Investors may not own more than 30% of the company in which they are placing the funding.
- Investors are not allowed to be employees within the company (but they may be directors of the company).
- Investors can only claim the tax relief associated with the funding once at least 70% of the SEIS funds invested have been spent by the business.
- The total shares issued by the company to the investor must be paid in full, and in cash, when they are issued.
- Shares issued must be held for a period of at least three years.
Restrictions related to the business:
- A business can only raise a maximum of £150,000 in funding via SEIS. This relates to the total funds raised via SEIS and is not an annual restriction.
- The company will not be eligible for SEIS funding if it has previously had funding via the alternate government schemes of EIS or VCT.
- All funding received via SEIS must be spent within three years of the investment in qualifying business activity.
- No individual within the company can own greater than 30% of the company and it should not be controlled by another company.
- Any shares issued must be full risk ordinary share.
- There should be no prearranged exit for investors or shareholders.
SEIS: Income Tax and Capital Gains Tax relief examples:
Income Tax relief
An individual investor can claim personal Income Tax relief on an investment in qualifying SEIS company shares issued on or after 6 April 2012. The tax savings associated result in an income tax reduction of up to 50% of the funds invested, to a maximum of £100,000 per individual, per tax year. The resulting maximum saving is therefore up to £50,000 per individual investor, per tax year.
The tax relief can only be claimed against an existing Income Tax liability. In other words, the saving is offset against the individual investors total income tax owed. If the saving is more then the total Income Tax, it will not result in a repayment of tax, however the saving can be split across the current and prior years to maximise the tax relief available.
For example: Jack invests £30,000 in a business via SEIS in the tax year 2012-13 (6 April 2012 to 5 April 2013). The SEIS Income Tax relief equates to £15,000 (50% of £30,000). His total tax liability for the year is £20,000. By using the SEIS tax relief, this can be reduced to £5,000 as a result of the SEIS investment.
Capital Gains Tax (CGT) relief
In addition to the Income Tax relief available when investing via SEIS, there is also a one year exemption (until 5 April 2013) from Capital Gains Tax for investors who reinvest their gains realised from disposals of any assets in SEIS approved businesses. This can result in up to an additional 28% in tax relief.
This “single year” exemption from CGT relates to gains in the 2012/2013 tax year which are reinvested in SEIS approved companies during the same year. This is a full tax exemption rather than a deferral of CGT which is available with the EIS scheme. Therefore to achieve the maximum tax relief, the investor will need to reinvest the capital gain in the year ended 5 April 2013.
Finally, as is the case with EIS or VCT, the disposal of SEIS shares will be exempt from CGT if they have been held for at least three years.
For example: Jenny sells an asset in June 2012 for £200,000. She realises a chargeable gain (before exemption) of £80,000, however she decides to reinvest this into SEIS qualifying shares in February 2013. The £80,000 gain will therefore be exempt from CGT. [Note: she does not need to invest the entire sale proceeds of £200,000 in order to get the full exemption].
If you would like to invest under SEIS or are planning to use SEIS to attract investors to your business, please call us on 020 8108 0090 to discuss the best solution for you or your company.
Please note that this summary does not cover all the detailed SEIS rules and regulations. This summary is based on current understanding of United Kingdom tax law and practice and should not be interpreted as the provision of tax, legal or financial advice.