The Seed Enterprise Investment Scheme: How it works
What is the Seed Enterprise Investment Scheme (SEIS), how will it work and how can it benefit your start-up?
Small businesses have been the casualties of the recession; not only because of the fall in consumer spending, but also due to the difficult lending conditions. Banks are being more frugal with overdrafts and loans, and the charges and interest rates they are imposing, as well as the guarantees they’re asking for, are unreasonable in some cases.
There is a strong belief that the private sector will come to the economy’s rescue. And the government clearly shares this faith, because the Seed Enterprise Investment Scheme (SEIS) is chancellor George Osborne’s brainchild to get small businesses and entrepreneurs the funding they need and consequently, boost the economy.
Below is a summary of the SEIS – how the scheme will work in practice and how it could benefit your start-up:
What is it?
The chancellor announced the SEIS in December’s Autumn Statement, as a means to incentivise investment in early-stage companies. It should be included in the Finance Bill 2012, and draft legislation is already in circulation.
The idea of SEIS is not that new. In fact, the SEIS is very similar to the Enterprise investment Scheme (EIS), introduced in 1994. But the SEIS is focused on encouraging investments solely in small, young companies. Like the EIS, the incentive to investors comes in the form of income tax relief and an exemption from capital gains tax (CGT).
Investors can receive an income tax deduction worth up to 50% of investments of up to £100,000 per annum, and if the full amount is not utilised, any surplus may be carried back to the previous year.
Karen invests £120,000 via SEIS during 2012/13
Karen invests £70,000 via SEIS during 2013/14
As Karen has not used £30,000 of the £100,000 limit in 2013/14, she can carry back the surplus to the previous year. Therefore, she may obtain full income tax relief for both years. This means she will get a tax deduction of up to £95,000 over the two years, being 50% x (£120,000 + £70,000)
The investment must be in the form of shares and they must be issued on or after 6 April 2012 and before 6 April 2013. The shares must be fully paid up at the time of issue and held for at least three years in order to qualify for the full SEIS tax relief.
As well as the income tax relief, CGT exemption is also available on gains on shares within the SEIS programme, giving investors a further tax break worth up to 28% of their gain. Normally, the shares would need to have been held for three years to qualify for CGT exemption, but for the first year of the scheme, the government will offer a CGT holiday on any gains realised on the disposal of assets in 2012/13, provided the gains are re-invested in the SEIS programme in the same year.
James sells his shares for £200,000 in June 2012, making a profit (or gain) of £90,000. Providing James makes qualifying investments of at least £90,000 in SEIS shares in the remainder of 2012/13 and all other conditions are met, the £90,000 gain will be completely free of CGT. Note that James does not need to invest the proceeds of £200,000 in order to obtain full exemption from CGT.
CGT exemption may still be available even if the gain is not invested in full. It might help to see this using the example below.
James sells his shares for £200,000 in June 2012, making a profit (or gain) of £90,000. James makes qualifying investments of £30,000 in SEIS shares in the remainder of 2012/13 and all other conditions are met. Therefore, his exemption is restricted to £30,000 so £60,000 of his gain remains subject to CGT.
Who is eligible?
The business receiving the investment must be a UK-resident, unquoted company. A company is unquoted if its shares are not sold on a recognised stock exchange, such as the FTSE or NASDAQ. It must also have 25 or fewer employees, and gross assets of £200,000 or less.
The recipient must also be a new business (or preparing to start a new business), which is two years old or less. And finally, the recipient company can only obtain £150,000 of funding through the SEIS. This is a cumulative limit, not an annual limit. Furthermore, it must not have previously raised money under EIS or venture capital trust (VCT) schemes.
Who can invest?
The shareholder cannot be an employee of the company (unless they are a director of the company) nor have more than a 30% interest. The shareholder cannot receive any ‘value’ from the company during the three-year qualifying period. However, this does not include receipt of ‘ordinary commercial payments’ such as dividends or reimbursements of expenses if the investor is a director.
When will SEIS go live?
[UPDATE] The SEIS was included in Finance Bill 2012 and has been in operation since 6 April 2012.
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This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayers’ circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.