Out-Law Guide 8 min. read
09 Oct 2012, 4:10 pm
This guide was last updated in August 2018
This Guide highlights the main conditions that need to be satisfied, but the conditions are complex and you should take professional advice before making an investment.
The qualifying conditions for SEIS are similar to, but more restrictive than, the Enterprise Investment Scheme (EIS) qualifying conditions. For more details of EIS, see our separate Out-Law guide.
SEIS relief may be available to an individual who subscribes new shares in a small company which began trading less than 2 years ago. In order to benefit from the relief, the relevant shares must be held for at least three years after issue.
The relief consists of an initial 50% income tax saving and an exemption from capital gains tax when the SEIS shares are disposed of.
A CGT liability from another asset disposed of in the tax year 2012/2013 can be eliminated by reinvesting the gain into SEIS shares in the same tax year. Any gains made from the tax year 2013/2014 onwards that are reinvested in SEIS shares will qualify for a 50% exemption from CGT.
As with EIS investments, there are detailed conditions that apply to both the investor and the investee company.
There is an investment limit of £100,000 per annum per investor. In addition the company cannot raise more than £150,000 in total through SEIS and there can have been no previous EIS or Venture Capital Trust (VCT) investment in the company.
The company (or if it is a member of a group, the group) must have 25 or fewer full-time employees (or part-time equivalents).
The company (or group if applicable) must have gross assets of no more than £200,000 immediately before the SEIS share issue.
Tax reliefs are available to individual investors who subscribe for shares in SEIS qualifying companies on or after 6 April 2012.
SEIS investors can claim upfront income tax relief of 50% of the amount subscribed, up to an annual investment limit of £100,000, provided that the shares are held for three years.
In addition, there are a number of CGT reliefs available to SEIS investors:
The shares must be new, ordinary shares with no special rights attached to them. They must be subscribed wholly in cash (which means that the consideration must be money and not other assets) and the cash must be paid in full by the time the shares are issued.
The purpose of issuing the shares must be to raise money for a qualifying business activity and all of the money raised must be used in a qualifying trade carried on by the parent company or 90% subsidiary within three years.
For shares issued on or after 15 March 2018, the 'risk to capital' condition must be met in order for SEIS relief to be available. This condition is intended to exclude investments designed to preserve capital for investors.
The condition is met if, having regard to all the circumstances, it would be reasonable to conclude that the issuing company has objectives to grow and develop its trade in the long term, and there is a significant risk that the investor will have a loss of capital of an amount greater than their net investment return.
SEIS relief applies only to individuals and not, for example, companies or trusts. The individual does not need to be resident and ordinarily resident in the UK for tax purposes when the shares are issued but will need to be liable for UK income tax.
There are certain restrictions affecting the investor, the main one being that the SEIS investor cannot be 'connected' with the company. An investor will be connected with a company:
An investor's associates for these purposes include: spouses, civil partners, children, grandchildren, parents, grandparents or partners in any business partnership of which the investor is a member or companies which the investor controls. Brothers, sisters, nephews, nieces, uncles and aunt are not considered to be associates for this purpose.
A 'disqualifying arrangements' test means that SEIS relief will not be available if the shares are issued, or any money raised by the issue employed, in consequence or anticipation or otherwise in connection with disqualifying arrangements. Arrangements are 'disqualifying arrangements' if the main, or one of the main purposes, of the arrangements is to secure that the investee company carries on a qualifying activity and that shares issued by it qualify for SEIS relief; and either
In order to qualify for SEIS relief, the company must:
Any activities apart from the qualifying trading activities must not be significant.
Most trades are qualifying trades provided that they are conducted on a commercial basis with a view to making profits, however certain activities are excluded and the trade of the company must not include these activities to any substantial extent during the three-year qualifying period.
Excluded activities include: dealing in commodities, shares and land; financial activities including banking and insurance; leasing or receiving royalties or licence fees, providing legal or accountancy services; property development, operating or managing hotels, nursing homes or residential care homes and energy generation For the full list, see the HMRC VCM manual.
Companies which HMRC consider are "in difficulty" are not eligible for investment under the EIS scheme.
In addition a trade will only be SEIS qualifying if it commenced less than two years before the share issue date.
The company must not have been controlled by another company in the period from the date of incorporation. This can prevent the relief being available if an 'off the shelf' company is used which has had a corporate shareholder before it is used by the SEIS business. However, shares issued after 6 April 2013 by 'off the shelf' companies are no longer caught if the control existed during a period where only subscriber shares had been issued, and the company had not yet begun, or begun preparations for, its trade or business.
SEIS provides very favourable tax reliefs for investors. However, there are some potential hurdles and pitfalls, which include:
There are also various anti-avoidance measures, which are beyond the scope of this Guide, designed to prevent abuse of the SEIS. The rules are complex and it is essential that advice is taken at the outset and also before any transactions or arrangements are entered into during the three year period for which the shares must be held.
A capital gains tax liability from an asset disposed of in the tax year 2012/2013 can be eliminated by reinvesting the gain into SEIS shares in the same tax year.
For later tax years there is a 50% CGT exemption for gains which are reinvested in SEIS shares. The remainder of the gain reinvested will be deferred until a disposal of the SEIS shares.
The maximum gain that can qualify for SEIS reinvestment relief is £100,000. However, there is a restriction on relief if the investor's subscription for shares exceeds £100,000. The maximum gain that can qualify for SEIS reinvestment relief if the subscription exceeds £100,000 is calculated by applying a formula. However, the effect of the formula is that if more than £100,000 is invested, the gains qualifying for exemption will be less than £100,000.
Some examples of how SEIS reinvestment relief works:
John sells an asset in August 2012 for £250,000, realising a chargeable gain of £100,000 (before exemption). Rather than paying CGT on the gain, he decides to reinvest the gain by making a qualifying SEIS investment. John subscribes £100,000 for SEIS shares in 2012/13 which he disposes of for £150,000 in August 2016.
As John has reinvested the whole of his gain and it does not exceed the annual limit of £100,000, the £100,000 gain in 2012/13 is free from CGT. John receives income tax relief of £50,000 in 2012/2013 and when he disposes of his shares in 2016/17, the £50,000 gain is CGT exempt.
Neela sells an asset in June 2013 for £200,000 and realises a chargeable gain (before exemption) of £80,000.
If she makes qualifying investments of at least £80,000 in SEIS shares in 2013-14, and all other conditions are met, she can claim that £40,000 (half of the gain) is exempted from CGT. She does not need to invest the whole £200,000 sale proceeds in order to get full exemption.