Take advantage of the tax breaks while avoiding the pitfalls: Investment through SEIS
There’s been a lot of excitement recently about the Seed Enterprise Investment Scheme (“SEIS”). The tax benefits can be significant, with the scheme exemplifying the Government’s plans to encourage investment in early stage start-ups. Unsurprisingly however, an extensive list of conditions is attached. Navigating these can be tricky so we’ve had look at some of the key issues.
SEIS investors must be individuals, i.e. you can’t invest through a company, partnership or other corporate vehicle. Investors (along with their associates) cannot own more than 30% of the company’s issued share capital or control more than 30% of the voting rights.
Investors don’t need to be UK resident but must have UK income tax liability against which relief under the scheme can be offset.
An SEIS investor can be a director of the company but otherwise cannot be employed by the company.
In each tax year each investor can make up to £100,000 worth of investment through the scheme. However, there is a £150,000 cap on how much investment any one company can raise via SEIS investment.
The scheme applies to shares issued on or after 6 April 2012 and the shares must be fully paid up, in cash, on issue. The shares must be non-redeemable, ordinary shares and cannot carry any preferential rights on a winding up.
The shares must be “full-risk” which means that no special protections can be put in place to protect the investor from any losses.
The investor must hold the shares for at least three years from the date of issue or else relief will be withdrawn or reduced. No arrangements should be in place at the time of issue for the future sale of the shares.
The company must be UK resident or have a permanent establishment in the UK. It must be unquoted, which means that private companies and companies listed on AIM may be eligible but companies listed on the main market of the London Stock Exchange will not be.
The company must not be under the control of another company and must not be a member of a partnership. It must have fewer than 25 employees and have no more than £200,000 in gross assets.
The purpose of the company must be to carry on a trade and that trade must be less than two years old from the date of issue of the shares. The trade cannot be “excluded”. The list of excluded activities is extensive and includes financial activities, the provision of certain professional services and property development. Take a look at the full list on HMRC’s website.
Generally, the manufacture and / or distribution of retail products should be fine, but we suggest you seek specific advice on whether or not your company qualifies.
So, there are considerable hoops to jump through, boxes to be checked and conditions to be met. But, if you make it down the list, SEIS investors can benefit from relief against their income tax liability and may not be liable for capital gains tax following a sale of the shares. The potential benefits are as follows:
- Income tax relief – available on 50% of the cost of the shares up to the £100,000 maximum. For example, if you were to invest £30,000 in the tax year 2013-2014 and your income tax liability for that tax year was £25,000 then you could reduce that tax liability to £10,000, i.e. £25,000 – £15,000 (50% of £30,000).
- Capital gains tax – the sale of the shares should be free from capital gains tax, if: (i) you have held the shares for at least three years; and (ii) you have received income tax relief on the cost of those shares as set out above.
It’s an interesting scheme and certainly worth investigating. However, to ensure that the complex list of requirements doesn’t trip you up, contact a specialist small business lawyer at Atypical Law for a free, no obligation chat before investing through SEIS or allowing your company to raise finance this way.