New businesses often struggle to find investors at the time when they really need funds. The Seed Enterprise Investment Scheme (SEIS) is designed to help small businesses raise equity finance through tax reliefs to investors who purchase shares in the company. It is very appealing to investors due to this generous tax relief.

Income Tax relief is available to individuals who subscribe for qualifying shares in a company which meets the SEIS requirements, and who have UK tax liability against which to set the relief. Investors don’t need to be UK resident.

Other features include:

  • Investors can receive initial income tax relief of 50% on investments up to £100,000 per tax year in qualifying shares issued on or after 6 April 2012.
  • A CGT exemption will offered in respect of gains realised on the disposal of assets in 2012-13, that are reinvested through SEIS in the same year.
  • The individual investor can be a director of the company, but not an employee.
  • An individual’s stake in the company can be no more than 30%
  • SEIS tax relief applies only to recently incorporated companies.
  • The company must have 25 or less employees and gross assets of up to £200,000.

For 2012-2013 only, a CGT exemption will be offered in respect of gains realised on the disposal of assets that are invested through SEIS in the same year.

Shares must be held for a period of 3 years from date of issue, for relief to be retained. If they are disposed of within that 3 year period, or if any of the qualifying conditions cease to be met during that period, relief will be withdrawn or reduced.

Relief is available at 50% of the cost of the shares, on a maximum annual investment of £100,000. The relief is given as a reduction of tax liability, providing there is sufficient tax liability against which it can be set. A claim to relief can be made up to 5 years after the 31 January following the tax year in which the investment was made.

Example 1:

Jenny invests £20,000 in SEIS shares in the 2012 to 2013 tax year in SEIS.
The relief available is £10,000 (£20,000 at 50%).

The amount owed for the year (before relief) is £15,000 which she can reduce to £5,000 as a result of her investment.

Example 2:
James invests £20,000 in the 2012 to 2013 tax year in shares.
The relief available is £10,000 (£20,000 at 50%).

The tax owed for the year (before relief) is £7,500. James can reduce his tax bill to zero as a result of his SEIS investment, but loses the rest of the relief available.

There is also a ‘carry-back’ facility which allows all or part of the cost of shares acquired in one tax year to be treated as though the shares had been acquired in the preceding tax year. The SEIS rate for that earlier year is then applied to the shares, and relief given for the earlier year. This is subject to the overriding relief limit for each year.

Note that there is no SEIS rate earlier than 2012 to 2013, so there is no scope for carrying relief back before that year.

This is a generous scheme in the right circumstances. If you are considering an SEIS investment speak to us first to make sure you qualify and for realistic investment advice.

More information can be viewed at: https://www.gov.uk/seed-enterprise-investment-scheme-background

Call us if you have any questions or you need to discuss your situation.