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

Subscribers: see SEIS: Subscriber Guide this contains lots of worked examples and answers many different FAQs

At a glance

Under SEIS, a taxpayer may invest up to £100,000 in a qualifying new start-up business and be eligible for income tax relief of 50 per cent.

A further relief is given when capital gains are reinvested into a SEIS company (see SEIS Reinvestment relief).

  • 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.*
  • SEIS shares issued before 6 April 2013: start-ups should avoid purchasing potential SEIS companies from incorporated incorporation agents (e.g. companies) because the fact that the company has been owned by another company will disqualify it from relief. This error is corrected from 6 April 2013 when legislation was introduced to prevent a company from being disqualified from SEIS where it was established by a corporate formation agent before sale to its ultimate owners.
  • Share loss relief may be available in the event of company failure. This is after taking into account tax relief already given on the sale of SEIS shares at a loss: the loss can be set against capital gains or income
  • As the company must be an unquoted trading company at the time of issue, it is likely that the shares will qualify for Business Property Relief once owned for two years. This may be lost if the company becomes listed on a recognised stock exchange.
  • A company which has issued shares under the SEIS scheme can then go on to issue shares under the EIS scheme as long as the qualifying conditions are all met.

*SEIS relief was originally to apply only for shares issued in a set period up to 5 April 2017, this was removed by Finance Act 2014. 

SEIS Reinvestment relief and CGT 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 may be reinvested in SEIS companies to obtain Reinvestment relief. From 2013/14 this relief is restricted to half of the gain in these years. In 2012/13 reinvestment relief was unrestricted.

Disposals of SEIS shares will be exempt from CGT after a three year qualifying period.

  • If the SEIS investment makes a loss, an individual will also be able to offset the capital loss against income.

What's new in SEIS?

From Royal Assent to Finance Act 2018 on 15 March 2018, a new “Risk to Capital” condition will apply to companies seeking to raise capital under the SEIS.

  • The test has two legs. It must be reasonable to conclude (when the shares are issued)
    • The issuing company aims to grow and develop its trade in the long term
    • There is a significant risk that lost capital will exceed net investment return, including income tax relief
  • These are to be considered in relation to all circumstances; a list is included in the legislation, but this is not intended to be exhaustive.
  • From 1 December 2017, HMRC are not giving advance assurance to companies where the risk to capital condition is not met.

The Finance (No2) Act 2017 which received royal assent on 16 November 2017, amended the requirements for EIS, SEIS and VCT to:

  • Clarify the EIS and SEIS rules for share conversion rights; the rights to convert shares from one class to another will be excluded from being an arrangement for the disposal of those shares within the no pre-arranged exits requirements for the EIS and SEIS for shares issued on or after 5 December 2016

From 6 April 2016:

  • All energy generation activities are excluded activities for the purpose of all tax-advantaged venture capital schemes: EIS, VCT, SEIS and SITR.

From 30 November 2015:

  • The list of excluded activities includes making reserve electricity generating capacity available, for example through contracted arrangements such as a Capacity Market agreement or Short Term Operating Reserve contract.

From 6 April 2015:

  • The list of excluded activities for SEIS and EIS includes subsidised generation of electricity involving a) contracts for difference or b) renewable sources where anaerobic or hydroelectric power is involved.
  • The requirement that 70% of SEIS money has to be spent before EIS or VCT shares or securities can be issued was abolished from 6 April 2015. 

Overview & examples

Income tax and CGT reliefs example

For example:
In June 2017/18 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. He receives income tax relief of £37,500 on his SEIS investment and CGT relief on 50% x £75,000 x 20%. Three years later, in 2020/21 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 60% of his investment:

  • Income tax relief £37,500 (£75,000 x 50%)
  • CGT saving on investment £7,500 (50% x £75,000 x 20%)

So his investment has a net cost of £30,000

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 £35,000 (£175,000 x 20%). 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.

Rule for earlier years

If Andy had made his capital gain in 2012/13, and invested it in SEIS that year, he would obtain income tax relief on his investment of 50% and his whole £75,000 investment would qualify for CGT exemption.

Loss relief after three years

See SEIS: Subscriber Guide

Loss relief if investment fails before the qualifying investment period ends

See SEIS: Subscriber Guide

Noting that if there is capital loss; it can be claimed against income under Share Loss relief.

SEIS v EIS: at a glance

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.
  8. From 6 April 2015 the requirement that 70% of SEIS money has to be spent before EIS or VCT shares or securities can be issued was abolished.

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 for SEIS.
  • 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. 
    • The rights of an individual's associates are attributed to the individual for this 30% test.
  • 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.
  • Have a permanent establishment in the UK.
  • Not use the funds raised to acquire shares in another company or, from 18 November 2015, the trade and assets of another entity.

 

 

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