Nichola Ross Martin's Tax Consultancy

Seed Enterprise Investment Scheme (SEIS): a new tax relief for start-ups introduced by the Finance Bill 2012.

SEIS in outline

• Taxpayers who invest up to £100,000 in a qualifying new start-up business will be eligible for income tax relief of 50 per cent.
• Relief is offered regardless of the rate at which the investor pays tax.
• The SEIS applies to investment in companies, and not in unincorporated businesses or LLPs.
• Investment must be in subscription to new shares issued on or after 6 April 2012 until 5 April 2017.

SEIS Reinvestment relief

As an added incentive to encourage more people to back ‘riskier’ companies, a capital gains tax (CGT) break is also offered for investments made into the new scheme:

• Capital gains arising on the disposal of an asset in 2012-13 and invested through the SEIS in the same year will be completely exempt from CGT - this represents up front tax relief of up to 78%.
• Disposals of SEIS shares will also be exempt from CGT after a three year qualifying period.

For example:
In June 2012/13 Andy retires, disposing of his company together with a commercial property which does not fully qualify for CGT Entrepreneurs' Relief that he had bargained for, leaving him with a potentially chargeable gain of £75,000. He invests the gain into a new SEIS qualifying company set up by his neighbour. This ensures that the gain is tax-free. He receives income tax relief of £37,500 on his SEIS investment. Three years later, in 2015/16 he sells his SEIS shares for £250,000 to private equity, provided that all the qualifying conditions have been met his SEIS exit gain is then also exempt from tax.

His tax savings on his SEIS investment amount to 78% of his investment:

• Income tax relief £37,500 (£75,000 x 50%)
• CGT saving on investment £21,000 (£75,000 x 28%)

So his investment has a net cost of £16,500

Assuming that Andy does make a profit on disposal of his shares (which is by no means guaranteed, as any investment of this nature is potentially of high risk) in our example he saves an additional £49,000 (£175,000 x 28%). The saving would be £17,500 (£175,000 x 10%) if he was a director and his shares would have otherwise qualified for CGT Entrepreneurs' Relief.

The SEIS is modelled largely on the existing Enterprise Investment Scheme, with the following key differences:

1. There is no restriction on directors investing under the scheme, providing they meet the other investor tests.
2. The amount that a company can raise under the SEIS is limited to £150,000 in total.
3. Investors will not be able to claim relief until the company has spent 70% of the money raised.
4. The company must use SEIS investment money within three years.
5. The company may have subsidiaries.
6. The eligibility is by reference to the age of the trade rather than the company.
7. SEIS relief is open to past employees.

Investors and companies must meet the following conditions:

An investor

• Cannot be an employee of the company: a director is not treated as an employee
• Must not hold more than 30% of the shares, voting power or entitlement to assets in the event of winding up, during the qualifying investment period
• Must not have any related investment or linked loan arrangements in place
• Must subscribe for genuine commercial reasons and not as part of a tax avoidance scheme.

A SEIS company must:

• Have less than 25 employees
• Have gross assets of less than £200,000
• Have been trading for fewer than 2 years
• Not have raised any money from EIS or VCT investors
• Carry on a genuine new trade.

Small print and links

SEIS will add new Part 5a into ITA 2007. The SEIS is introduced by the 2012 Finance Bill which is currently being debated by Parliament we will be extending this guidance when all changes to the draft bill are confirmed.