The Seed Enterprise Investment Scheme (SEIS) is designed to aid small, early-stage companies to raise equity finance by offering tax reliefs to investors that purchase new share in the companies. It works with the existing Enterprise Investment Scheme (EIS) that offers tax reliefs to investors in higher-risk small companies. SEIS recognises the difficulties that early stage companies face when trying to attract investment. They do this by offering tax relief at a higher rate.
SEIS applies to shares issued on or after 6th April 2012. As it is expected that companies will go on to use EIS afterwards, the rules have been designed to be the same.
Income Tax Reliefs
Income Tax relief is available for people in a company that meets the SEIS requirements, who subscribe for qualifying shares and who have UK tax liability against which to set the relief. Investor, however, don’t need to be a UK resident.
From date of issue, the shares must be held for a period of 3 years for relief to be retained. If they are disposed of within the 3 year period, or if any of the qualifying conditions cease to be met during that period, then relief will be withdrawn or reduced.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. It is offered as a reduction of tax liability, as long as there is sufficient tax liability to set it against. A claim can be made up to 5 years after 31st January following the tax year in which the investment was made.
There is a ‘carry-back’ facility that allows the cost of shares acquired in a tax year to be used as though the shares had been acquired in the previous tax year. The SEIS rate for the earlier year is then applied to the shares and relief given.
Capital Gains Tax: Reinvestment Relief
Originally only available for the 2012-2013 tax year, it has now been extended to 2013-2014 at half the rate. If an asset was sold and all or part of the amount of the gain in shares was reinvested, also qualifying for SEIS income tax relief, the Capital Gains Tax may be exempt for the amount reinvested. If an asset was sold that gave rise to a chargeable gain in 2013-2014, and all or part of the gain in shares was reinvested, also qualifying for SEIS income tax relief, half of the amount reinvested may be exempt from Capital Gains Tax. Capital gains reinvestment relief is subject to the £100,000 annual investment limit which applies for income tax relief. Gains of £100,000 may be exempted for 2012-2013 and up to £50,000 for 2013-2014. The final date that a claim can be made for 2012-2013 is 31st January 2019. For 2013-2014 it is 31st January 2020.
You do not have to dispose of the asset first, as the investment in SEIS shares can occur prior to the disposal of the asset, as long as the disposal and investment both take place in the same year.
If the ‘carry back’ facility is used for SEIS income tax relief, any claim to reinvestment relief is required to match the year that the shares are then treated as issued. If issued SEIS income shares in 2013-2014 then it is possible to claim SEIS income tax relief as though all or some had been issued in 2012-2013. Should this be done then the shares treated as issued in 2012-2013 are also treated as issued in 2012-2013 for the purposes of re-investment relief on gains made in 2013-2014 in respect of those shares.
The Capital Gains Manual gives guidance on when an asset is disposed of for Capital Gains Tax purposes, starting at paragraph CG14250.
Capital Gains: Disposal Relief
Any profit is free from Capital Gains Tax if income tax relief has been received on the cost of shares, and the shares are sold after they have been held for a minimum of 3 years.
Any other sale of the shares does not qualify for exemption from Capital Gains Tax if no claim to income tax relief is made.
Venture Capital Schemes
The company can follow a share issue under SEIS with other shares under EIS, or investment from a Venture Capital Trust (VCT). It must have spent at least 70% of the monies raised by the SEIS share issue before issuing any more.
If a company has already had investment from a VCT, or issued shares on an EIS compliance statement (EIS1), then they cannot issue shares under the SEIS scheme.