Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) is an excellent opportunity for startup companies and investors seeking to support them. At AHACCOUNTANTS, we are here to assist you in financing your startup business in the Nottingham area or in providing seed capital to such ventures.

The SEIS offers substantial tax relief for individuals willing to invest in new and growing companies. As the junior counterpart of the Enterprise Investment Scheme (EIS), it allows investors to enjoy generous income tax and capital gains tax (CGT) breaks, enabling companies to attract further investment to grow their business.

Key Features

The main features of the SEIS, applicable from 6 April 2024, include:

• A qualifying investor can invest up to £200,000 into qualifying companies in a tax year.
• Investors receive income tax relief of up to 50% of the amount invested.
• Unused relief in one tax year can be carried back to the preceding tax year, if available.
• The maximum amount that a company can attract through SEIS is £250,000.
• The company must not possess assets exceeding £350,000 prior to any SEIS investment.
• If an individual makes a capital gain on another asset and uses that gain for a SEIS investment, they will not be taxed on 50% of the liability, subject to specific conditions.
• There are extensive anti-avoidance measures to prevent exploitation for tax avoidance.

Who Can Invest?

A ‘qualifying investor’ is defined as someone who is not an employee of the company in which the investment is being made, although they can be a director. Investors must also ensure they do not hold more than 30% of any of the following in the company or a 51% subsidiary:

• Ordinary shares
• Issued shares
• Voting rights
• Assets in a winding-up scenario

Which Shares Qualify?

The shares must be ordinary shares that are fully paid and subscribed for wholly in cash. They must be held for three years from the date of issue, and the company must have issued the shares to raise money for a qualifying business activity, including preparations for a new trade or research and development related to a new qualifying trade.

Which Companies Qualify?

The SEIS is designed to benefit new companies. The basic requirements include:

• The company must be unquoted.
• The trade must be a ‘new’ qualifying trade, not carried out by any person for longer than three years at the date the shares are issued.
• The company must operate solely to conduct one or more qualifying trades throughout the three-year period from the date of share issuance.

Additional conditions include having a permanent establishment in the UK, being solvent at the date of share issuance, and not exceeding gross assets of £350,000 immediately before the investment.

Which Trades Qualify?

The company must carry on a genuine new trading venture. Most trading activities will qualify unless they fall into excluded categories such as property development, retail distribution, hotels, nursing homes, and farming.

How is Relief Obtained?

The relief is applied as a reduction against the total tax liability for the year but cannot result in a tax repayment. Unused relief can be carried back to the preceding year if applicable.

Examples

• Samantha invests £60,000 under the SEIS, potentially qualifying for a tax relief of £30,000 (50% of her investment). Her tax liability for the year is £45,000, allowing her to reduce it to £15,000.
• Richard also invests £60,000, but with a tax liability of only £20,000. He can claim relief of £20,000 for that tax year and carry back the unused relief of £10,000 to the previous year.

Can the Relief Be Withdrawn?

Yes, certain events occurring within three years from the share issuance can lead to the withdrawal of relief, such as the disposal of shares during that period.

What About the CGT Position?

If shares are sold more than three years after issuance, any gains are CGT-free. However, shares sold within three years would be chargeable but may qualify for Business Asset Disposal Relief (BADR) if conditions are met.

A Bonus Exemption

There is also a reinvestment relief available when assets are disposed of at a gain and funds equal to that gain are invested in SEIS shares. This relief allows a 50% reduction in the chargeable gain.

Comparison to EIS

While the SEIS supplements the EIS, there are key differences. Notably, the SEIS provides up to 50% income tax relief on investments up to £200,000, making it more favorable for smaller investments compared to the EIS.