Tony Granger gives an overview of the seed enterprise investment scheme rules following Budget 2014.
The seed enterprise investment scheme (SEIS) was introduced in 2012 to provide for a new form of individual investment into high risk unquoted companies. To offset the risk to the investor, HMRC allows for 50% income tax relief on the investment into an unquoted company start-up, to stimulate investment into what is considered to be a high risk proposition. The maximum an individual can invest is £100,000 per tax year and the maximum to be invested into a company under the SEIS is £150,000.
In the 2012/13 tax year, capital gains were relieved through capital gains reinvestment relief (not merely deferred as under the EIS), and the investor could end up with 78% worth of tax reliefs. Add to this the potential for loss reliefs if a company fails, and the total relief would have been 100.5%.
The rules changed in 2013/14 tax year in respect of capital gains tax reinvestment relief. This was reduced to 50% of the gain arising in 2013/14 as being exempt from capital gains tax if you acquire SEIS shares. Income tax relief continued at 50% of the investment made, with a maximum investment of £100,000 (which could be backdated to the 2012/13 tax year).
The 2014 Autumn Budget has breathed new life into the SEIS sector. It was announced in the 2014 Budget that SEIS was to be made permanent, with income tax relief at 50% (even though you personally may have a marginal rate of tax rate which is lower, at 20%, 40% and 45%). The capital gains tax reinvestment relief was also extended, but with relief being restricted to half of the reinvested gain.
This is good news indeed for the small business community struggling to raise equity finance.
Qualifying EIS companies
To qualify for a SEIS company the maximum is to have 50 staff and £200,000 in gross assets. The business must be less than two years old. It could be older, but the trading period must be less than two years.
The company must apply for advance clearance that it qualifies before the shares are issued.
Investors should subscribe for the shares only after the company has been set up and tax clearance granted (SEIS 1). Otherwise, the tax reliefs will not apply.
Income tax relief
The investor can deduct 50% of the investment made from his tax liability. However, he must have the tax liability to do so. So, invest £10,000 and £5,000 comes off your tax bill. The tax relief can be backdated to the previous tax year.
Capital gains tax reliefs
Capital gains tax may be payable when you dispose of an asset in that tax year. Reinvestment relief now allows you to treat 50% of a gain arising as exempt from CGT if you acquire SEIS shares. However note, you cannot obtain CGT reinvestment relief unless you also get SEIS income tax relief. There is no CGT if you sell your SEIS shares, unless you did not obtain income tax relief, when the gain may be taxable.
Loss relief
If the company fails, loss relief is available for the unrelieved portion of your investment.
In the 2014/15 tax year the downside protection is 86.5% - you will get back £8,650 for investing £10,000 if the business fails and you get loss reliefs in addition to your tax reliefs.
IHT relief
You should have inheritance tax relief after two years of holding the SEIS shares.
EIS and SEIS
You can invest into SEIS and EIS at the same time and claim maximum reliefs. But companies that have already had EIS or venture capital trust investments will not qualify for SEIS investment.
£150,000 is the total amount the company can raise under the SEIS. If you then raise EIS money you must have spent at least 70% of the SEIS money before you can issue any EIS shares. There is now no minimum investment for the SEIS, and you can invest into more than one company, up to £100,000 in any one tax year.
Practical Tip:
SEIS investments can reduce income tax and capital gains tax, and shelter inheritance tax. However, they are higher risk, and you should not invest for tax reasons alone. Diversify your investments to reduce risk. As always, seek expert independent financial advice based on your personal circumstances.
