If you want to know what is the Seed Enterprise Investment Scheme (SEIS) and how it works, I suggest you carefully read this article in which we’re going to explain:
SEIS what is it?
According to the UK Government’s SEIS guidance, the Seed Enterprise Investment Scheme (SEIS) provides tax relief for individuals prepared to invest in new and growing companies. It is the junior version of the Enterprise Investment Scheme (EIS).
Investors can obtain generous income tax and capital gains tax (CGT) breaks for their investment and companies can use the relief to attract additional investment to develop their business.
Seed Enterprise Investment Scheme key features
The key features of the relief can be summarised as follows:
- A qualifying investor will be able to invest up to £100,000 into qualifying companies in a tax year
- They will receive income tax relief of up to 50% of the sum invested
- Unused relief in one tax year can be carried back to the preceding tax year if there is unused relief available for that year
- The maximum amount that a company can attract in investment qualifying for the SEIS is £150,000 in total
- The company must not have net assets of more than £200,000 before any SEIS investment
- An individual who makes a capital gain on another asset and uses the amount of the gain in making a SEIS investment will not pay tax on 50% of the liability, subject to certain conditions
- There is a huge amount of anti-avoidance legislation to prevent exploitation for tax avoidance purposes.
Who can invest?
The official term is a ‘qualifying investor’. The primary requirement is that the investor or someone who is associated with them must not be an employee of the company in which the investment is being made. They can however be a director. They must also ensure that they do not have (directly or indirectly) a substantial interest in the company. This is defined by reference to holding more than 30% of any of the following (in either the company itself or a 51% subsidiary of the company):
- Ordinary shares
- Issued shares
- Voting rights
- Assets in a winding up
Which shares qualify?
The shares must be ordinary shares that have been subscribed for wholly in cash and are fully paid up.
They must be held for a three year period from the date of issue. The company must have issued the shares for the purpose of raising money to fund a qualifying business activity that either involves the carrying on (or preparations to carry on) a new trade. Using the funds to meet the costs of research and development intended to create or benefit a new qualifying trade will also be acceptable. The money must be spent within three years of the date of issue of the shares. The anti-avoidance requirement is that there must be no pre-arranged exit for the investor involving the purchase of the shares, or the disposal of assets.
Which companies qualify for SEIS?
Rules are intended to benefit new companies. The basic requirements are that the company must be unquoted. The trade must be a ‘new’ qualifying trade. This is one not carried out by either the company or any other person for longer than two years at the date the shares are issued.
The company also must exist wholly for the purpose of carrying out one or more qualifying trades throughout the three year period from the date of issue of the shares. If the company goes into receivership or administration or is wound up during this period, this will not prevent the relief from being given, provided there was a commercial justification for the action.
Other main conditions relating to the company can be summarised as follows:
- Must have a permanent establishment in the UK
- Must be effectively solvent at the date of issue of the shares
- May have a qualifying subsidiary
- The company must not be a member of a partnership
- Immediately before the investment, the gross assets of the company plus the value of any related entity (one that holds more than 25% of the capital or voting power in the issuing company) must not exceed £200,000
- There are less than 25 full-time employee equivalents in the company and any related entity
- The company must not have had EIS or Venture Capital Trust (VCT) investment before the SEIS shares are issued; and
- The total amount of investment made under the SEIS in the company must not exceed an aggregate of £150,000
Which trades qualify?
The primary requirement is that the company must carry on a genuine new trading venture.
There may be a problem if the same activities had been carried on as part of another trade. Basically, any trading activity will qualify unless it is an excluded activity within the definitions used for the EIS. This means that activities such as property development, retail distribution, hotels, nursing homes, and farming will not qualify. The trade must be carried out on a commercial basis.
How is relief obtained?
The relief is given as a reduction against the total tax liability for the year but cannot turn a tax liability into a tax repayment. In that situation, the individual would be able to carry back the unused relief to the preceding tax year for use if there was any tax unrelieved for that year.
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