26 Jun 2020
The Seed Enterprise Investment Scheme (SEIS) is designed to attract investors into small, young companies by offering some of the most generous tax breaks in the UK.
SEIS has already brought millions of pounds of funding into early-stage businesses. It could become even more important as the coronavirus pandemic recedes and small companies need urgent cash injections.
But there are several rules companies must follow so their investors can qualify for the reliefs available.
SEIS offers tax relief to individual investors who buy new shares in small, early-stage companies. It is one of four schemes designed to help small or medium-sized companies raise money – the others are the Enterprise Investment Scheme (EIS), Social Investment Tax Relief (SITR) and venture capital trusts (VCT).
SEIS was set up in 2012 and is much newer than its parent initiative, EIS, which started in 1994. The Seed Enterprise Investment Scheme is similar to EIS but designed for even smaller, newer companies. It also provides more generous tax breaks for investors.
Companies can receive a maximum of £150,000 through SEIS investments. They must follow the qualifying rules so investors can claim and keep the associated tax reliefs.
Rules include that your company must have fewer than 25 full-time employees, not more than £200,000 in gross assets, and it must have been trading for no longer than two years.
If you raise money through SEIS, you must spend it within three years on a qualifying trade; preparing for such a trade; or research and development for one.
You cannot use the money to buy shares unless they are in a qualifying subsidiary and for a qualifying activity. Your company must also be a commercial business that aims to make profits.
Furthermore, your firm must be established in the UK. At the time of the share issue, it must not be trading on a recognised stock exchange, nor have any arrangements to become a quoted company. It should not have ever been controlled by another company, nor should it control another company, unless that firm is a qualifying subsidiary.
Your firm must not be a member of a partnership. If you have received investment through EIS or VCT schemes, you cannot use SEIS. Furthermore, SEIS shares must also meet EIS rules.
Your investors will lose the tax reliefs if your company does not follow all these rules for at least three years after the investment.
With SEIS, investors can claim income tax relief on 50% of the investment on amounts up to £100,000 a year.
Another benefit is that investors can claim income tax relief in the tax year in which they invest, or the year before. However, they cannot carry forward unused income tax relief to future years.
Investors also cannot claim income tax relief in an SEIS investment if they and their associates are connected with the company from the date the company started. But you can get tax relief if you are a director of the company.
There are two capital gains tax (CGT) reliefs applicable to SEIS – reinvestment relief and disposal relief.
When investors sell any asset and use all or part of the gain to invest in SEIS shares, they will not have to pay CGT – this is called reinvestment relief. This also applies if the investor carries back the income tax to the previous year.
For a gain on an asset disposed in 2019/20, reinvestment relief is available on 50% of the initial SEIS investment, to a maximum of £50,000.
Disposal relief exempts an investor from paying CGT on a gain they make when disposing of SEIS shares. They can qualify for this relief if they dispose of SEIS shares after holding them for the minimum period for the scheme - which will be at least three years.
To qualify for either CGT relief, investors must also get income tax relief on the same SEIS investment.
Before applying for SEIS certification, you can ask HMRC if you are likely to qualify.
After receiving this advance assurance, send your application to HMRC, which will then permit you to issue certificates to investors so they can claim the tax reliefs. You do not need to raise the full investment amount stated in your application.
After issuing your shares, you must also complete a compliance statement.
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