SEIS Scheme Tax Relief Guide

The SEIS scheme is one of four venture capital investment schemes designed to help small companies to raise money when they begin to trade.

What is the SEIS Scheme?

The SEIS scheme, otherwise known as the seed enterprise investment scheme, is available to small, early-stage trading companies to support raising finance by offering a range of tax reliefs to investors purchasing new shares in those companies.

It is a form of venture capital investment which is in place to support new businesses. When an investor buys shares in a start-up company, SEIS tax relief is offered to them up to 86.5%.

SEIS tax relief is offered to individual investors, who then buy new shares in the company. For investors to claim and keep the SEIS tax relief related to their shares, there are a variety of rules that must be followed.

As SEIS applies to high investment risks, it’s imperative to note that the SEIS scheme will not suit all investors. The seed enterprise investment scheme is similar to the existing Enterprise Investment Scheme (EIS), but targeted at companies whose trade is not more than two years old and have not carried out any other trades previously unlike EIS Shares.

Introduced in 2012 by HMRC, the SEIS scheme provides a number of tax reliefs for investors, including automatic reductions and capital gains avoidance. However, this can depend on your tax bracket, so be aware of the bracket you are in.

What is the difference between the SEIS scheme and the EIS scheme?

Although similar, the SEIS scheme is aimed at new businesses who have been trading for less than two years and have not carried out any other trades. The criteria for each are different, with EIS shares supporting more established businesses and allowing higher investments.

What is the criteria for a SEIS scheme investment?

There are various requirements which must be met to ensure that a company is eligible for the SEIS scheme. If looking to invest into a new business, company’s gross assets cannot exceed £200k and they must not have benefited from any other forms of investment in the past.

How much can be invested into an SEIS scheme?

Anything up to £150K can be invested through the SEIS scheme. If anything over this is required for a company, the EIS scheme is a more suitable route and a professional at CSS Partners will be able to discuss this option.

SEIS Tax Relief

There are currently five SEIS tax reliefs.

Income Tax Relief

Individuals subscribing for new shares up to a maximum annual investment of £100,000, can claim up to 50% income tax relief on their investment in the year of investment or the previous year. Shares must be held for a minimum of three years, from the date of issue for relief to be retained.

Capital Gains Tax Reinvestment Relief

The relief will take the form of a 50% exemption from CGT where an individual realises a gain and invests the gain into qualifying SEIS shares. There is no limitation on the type of asset that may be disposed of. All types of disposal, including part disposals, will qualify. The £100,000 investment limit which applies for income tax relief also applies for re-investment relief.

The asset does not have to be disposed of first; the investment in SEIS shares can take place before disposal of the asset, providing that both the disposal and investment are deemed to take place in the same year.

Capital Gains Tax Exemption

Where income tax relief has been received and the shares are held for at least three years, any gains on disposal are entirely free from Capital Gains Tax. This works in exactly the same way as for EIS investment on profits made after the shares have been held for over 3 years and income tax relief has not been withdrawn.

Loss Relief

If shares are disposed of at a loss, subscribers can elect for the amount of the loss, less any income tax relief previously given, to be set against income for the year of disposal, rather than being restricted to using such losses against future capital gains only.

This works in the same way as for Enterprise Investment Scheme investments save for the fact that as the income tax relief is increased under SEIS, the overall investment protection is 72.5p in the £1 for a 45% tax payer if the investor realises a total loss and has not reinvested capital gains.

Inheritance Tax Exemption

This is the same as for EIS investments.

Maximum tax relief available

The culmination of these reliefs results in a maximum tax relief on the investment made of 86.5%.

How does the SEIS Scheme Work?

The company’s gross assets before issue of the seed enterprise investment scheme shares must be not more than £200,000 and the number of its full-time equivalent employees must be less than 26. The company must have a permanent establishment in the UK and not have benefited previously from EIS or Venture Capital Trust (VCT) investment. Directors, but not employees, will be able to invest in their own companies provided they own less than 30% of the company’s shares.

To comply with the European Commission’s state aid rules, the company must meet a ‘financial health requirement’ at the time the shares are issued; an SEIS scheme investment cannot be used to rescue a company in difficulty. A company will be able to raise up to £150,000 in total. There must be no prearranged exit for investors and the company’s trade must be a genuinely new venture. The seed enterprise investment scheme will last five years.

Who can use the SEIS Scheme?

Providing that your company complies with the following, your business can use the SEIS scheme:

  • If your company hasn’t been controlled by another company since it was incorporated.
  • It was established in the UK.
  • If your company carries out a new qualifying trade.
  • Your company isn’t trading on a renowned stock exchange at the same time of the share issue.
  • At the time of the share issue, the company isn’t looking to become a subsidiary or quoted company.
  • The company doesn’t controls another company, unless the company is a qualifying subsidiary.

Who can participate in SEIS?

Unconnected shareholders should be entitled to all of the reliefs above. For connected shareholders income tax relief and the CGT exemption are not normally available. Connection may be by financial interest or by employment with the company. Financial interest occurs where the subscriber and their associates (such are parents, children and business partners) control more than 30% of the company.

Employment includes directorships and also precludes the employment of associates (as defined above). However there is an exemption for business angels who become Directors.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

SEIS Scheme Tax Relief Guide 2
Taxoo
Taxoo is a leading business and financial resource aimed at supporting businesses by providing reliable information and resources that can save business owners time and money.

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