The attractions of the new SEIS
SEIS is the Treasury's new scheme designed to persuade investors to back the UK's fledgling businesses by offering generous tax breaks.
Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) already provide a way for individuals to invest in small unquoted companies. Now the Treasury has launched a new tax-incentivised method for putting money into even smaller companies – the Seed Enterprise Investment Scheme (SEIS).
SEIS has been put in place to assist very early stage enterprises, which would normally find it difficult to raise finance through traditional means. As the name suggests, SEIS is designed to complement the existing EIS legislation and the Treasury anticipates that participating companies may subsequently use the EIS to raise further funding.
Tax relief
Individuals who subscribe for qualifying SEIS shares can claim income tax relief at 50% up to a maximum annual subscription of £100,000 – in other words, the actual cost of investment after tax relief would be £50,000. While investors do not need to be UK residents they must have a UK tax liability, but the tax relief available is not reliant upon their marginal rate of tax. For example, a higher rate taxpayer who is subject to 40% tax would still receive tax relief at 50% of any SEIS subscription, but relief can only be claimed until an individual's tax liability is reduced to zero.
Just like an EIS, any shares within SEIS must be held for a period of three years to continue to benefit from income tax relief. On disposal, the SEIS shares are exempt from CGT.
A reinvestment relief is available for the tax year 2012/13 only. Where all or part of a capital gain arising in that year is reinvested into SEIS shares, the amount reinvested will be exempt from CGT. The £100,000 investment limit which applies for income tax relief also applies for reinvestment relief. The investment in SEIS shares can take place before disposal of the asset, providing that both disposal and investment take place in 2012/13.
The company
For investors to claim and retain SEIS tax relief, the company which issues shares must meet a number of requirements. It must have carried out the trade for which shares are issued for no longer than two years, must be unquoted, have gross assets of no more than £200,000 and less than 25 employees.
The amount a company can raise under SEIS is restricted to £150,000 in any three-year period and it cannot have received an investment from a VCT or EIS in the past. The company must spend all the SEIS money for the purposes of a qualifying business activity within three years.
The opportunity
These investments will be higher risk than VCT or EIS, which in themselves are already considered high risk, given the size and nature of the investee company. VCT and EIS providers may offer these schemes when they come across potential investments that are too small for the much larger tax-efficient offerings.
The attractive levels of tax relief might make these schemes of interest to those individuals who have maximised or are no longer able to make pension contributions, have fully utilised ISA allowances and considered other tax-efficient investments such as VCTs and EIS. However, given the high risk to capital invested, it is likely that they will be of most interest to those wishing to take advantage of the initial tax relief, combined with the potential of washing out a CGT liability arising in the current tax year. There is also the added possibility of setting any ultimate loss made against income tax. This cocktail of tax benefits means that, while there is still a high risk of capital loss from such schemes, such losses could be mitigated.
Seek advice
These types of investments are high risk and therefore not suitable or appropriate for everyone. Investments of this nature, while aiming to mitigate tax, can carry a significant risk to capital and you should not invest unless you can afford the loss of capital. Specialist advice is therefore essential.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
