Seed Enterprise Investment Scheme (SEIS) changes a boost to investors

Business angels set to benefit from capital gains relief extension and removal of ‘awkward’ clause

Chancellor George Osborne today announced an extension to reinvestment relief in relation to SEIS.

The capital gains tax relief applied to gains realised in 2012/13 and invested in the same tax year or 2013/14 and ‘carried back’. Osborne confirmed that the relief on half of the capital gains money reinvested in a start-up will now also apply to gains made in 2013/14.

Launched last year, the Seed Enterprise Investment Scheme (SEIS), like a number of government schemes, has taken some time to gain traction, in spite of the highly attractive tax incentives on offer to angel investors. Combined with income tax relief business angels can gain a tax relief of up to 78% on an investment of £100,000.

Tax partner at Kingston Smith LLP Mike Hayes explained why the news is likely to be welcomed by angel investors and boost the volume of SEIS investments:

“For example, a sale of a second home realises a capital gain of £130,000 in 2013/14. £100,000 of this is reinvested by the taxpayer into SEIS shares. Part of that gain equal to one half of the reinvestment (£50,000) will now be exempt from capital gains tax, leaving £80,000 taxable.”

Some disappointment was expressed at the maximum investment not being increased beyond £100,000 in the first year. Toby Ryland, corporate tax partner at chartered accountants HW Fisher & Company said: “The extension of the CGT exemption under the SEED EIS scheme is good news, albeit we would rather have seen the maximum investments under SEED EIS being increased. While the limits remain low, this will have only a relatively minor impact on entrepreneurial activity.”

And James King, managing director of Find Invest Grow, an investment firm specifically for student or graduate-led ventures argued the government could be more creative about tax reliefs to increase liquidity. “For example, unclaimed tax relief investors receive from the EIS and SEIS initiatives could be passed on to the start-up receiving investment.

“Start-ups could offset investor’s relief against corporation tax over two years, as well as NIC or VAT. This approach would provide tax reliefs to those that really need it, while incentivising investors.”

The Budget Report also confirmed the removal of a clause relating to the control of an SEIS investee company by another company, which was intended to protect but confused matters: “A defect in the SEIS drafting meant that this restriction applied from the date of incorporation,” said Hayes.

“This meant that if a company was formed by a formation agent that was itself a company, and which then owned the subscriber shares, SEIS relief was precluded forever. This change applies to shares issued on or after 6 April 2013.”

Hayes today welcomed the clarification: “This is a welcome change which removes an awkward defect in the legislation that has given the business angel community a few practical difficulties.”

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