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Seed EIS extension

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The 2013 Budget included an extension of the tax breaks for investment in start-up companies. This announcement has made the Seed Enterprise Investment Scheme (SEIS) even more accessible and attractive to both entrepreneurs and investors.

SEIS is the higher risk alternative to the Enterprise Investment Scheme. The objective is to help the development of smaller, riskier, early stage UK companies, which may face barriers in raising external finance. As a result of the risks in investing in these companies, the tax breaks are more generous, with income tax relief given at 50% of the cost of the investment, up to a maximum annual investment of £100k. The relief is given by way of a reduction to the tax liability, providing there is sufficient tax against which to set it. The requirement for a sufficient tax liability to absorb the SEIS benefit is important given that the highest rate of income tax is now 45% and yet the income tax relief is at 50%.

There was also a capital gains tax relief, which applied to capital gains made before 5 April 2013. The relief meant that capital gains on assets sold before 5 April 2013 would be free of tax if the sales proceeds were invested in a SEIS qualifying company before 5 April 2013. There has been a less generous extension to this relief for capital gains generated in the year ended 5 April 2014 where there is an investment in a SEIS company before 5 April 2014. This extends the total tax relief on SEIS investments to more than half of the cost of the investment.

The tax breaks do not stop at the time of the investment. If the SEIS company is successful and the shares are eventually sold at a profit, any gain will be free from capital gains tax provided the shares have been held for three years. If the company is not successful, further tax relief is available.

The SEIS reliefs are generous due to the high risk nature of the investments. Qualifying investments are shares in unquoted companies with fewer than 25 employees and less than £200k in gross assets. The test of the value of the company’s assets and staff numbers is at a time the qualifying shares are issued. The maximum that the company can raise under the scheme is £150k and the company’s trade, to the extent that the company has started trading, must be less than two years old at the date of issue of the shares. The company must not have carried on any other trade before the present trade. As the relief is for high risk ventures some trades are excluded from qualifying for SEIS status.

The twin benefits of immediate income tax relief and elimination of other gains make SEIS an attractive proposition. However, as the investments are high risk it has to be assumed that there is a strong likelihood that they will fail. They should always be appraised on their investment opportunity rather than as a mechanism to access tax breaks.

Seed EIS

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I have noticed a marked increase in questions about the Seed EIS scheme. Perhaps the forthcoming 31 January tax payment date is leading people to consider tax efficiency more closely!

The scheme is for companies which are seeking early stage funding in the first two years of their trade. There is a 50% income tax relief available for qualifying investments. Shares held for three years can be sold without capital gains tax. Capital gains made in 2012/13 and reinvested in this tax year into Seed EIS companies can be eliminated entirely. Other gains are deferred until the year that the Seed EIS company’s shares are sold.

The tax breaks are generous. This is a reflection of the high risk nature of such businesses. There are many conditions about the size of the business which also need to be satisfied in order for Seed EIS to be relevant. There are also practical considerations that need to be considered. The practical considerations include:-

A Seed EIS qualifying company cannot be under the control of another company. This sometimes leads to difficulties if a company is bought off the shelf from a company incorporator. HMRC have confirmed that companies set up by incorporating agents ( in situations where the incorporator is itself a company) will lead to loss of Seed EIS. This is because the incorporating agent controls the trader and therefore there is a time when the trader is under the control of another company.

Similarly there are certain steps which a subscriber should follow if they are also to be seeking Seed EIS relief. This is to prevent them accidentally tripping one of the conditions surrounding share ownership levels.

The conclusion is that Seed EIS, for qualifying activities, is a valuable and generous relief. However, it needs to be treated with care and the detail of the legislation understood and followed.