Seed Enterprise Investment Scheme (SEIS) is a tax-advantaged venture capital scheme introduced in April 2012 that offers investors enhanced income tax and capital gains tax (CGT) reliefs. It is designed to help smaller, riskier, early stage UK companies.
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. Under the current law, gains made in subsequent tax years would only be deferred if they were reinvested in SEIS shares. However, it was announced in the 2013 Budget that the rules will be changed so that gains made in the tax year 2013/4 that are reinvested in SEIS shares will qualify for a 50% exemption from CGT provided the reinvestment is made in the 2013/4 or the 2014/5 tax year.
As with EIS investments, there are detailed conditions that apply to both the investor and the investee company.
Are there any limits on amounts that can be raised?
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.
Are there any limits on the size of 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.
How does the relief work?
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:
- an exemption from CGT on disposal of the shares, provided the shares have been held for three years;
- relief for allowable losses on disposal of the shares (less any income tax relief already claimed);
- an exemption from CGT on gains realised from other assets disposed of in tax year 2012/2013, provided that the gains are reinvested in a qualifying SEIS investment in the same year. The £100,000 investment limit that applies to income tax also applies for CGT reinvestment relief; and
- it was announced in the 2013 Budget that a 50% relief from CGT on gains realised from assets disposed of in the 2013/4 tax year will be introduced, provided the gains are reinvested in a qualifying SEIS investment in 2013/4 or 2014/5
What kind of shares are eligible for SEIS relief?
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.
Who can qualify for SEIS relief?
SEIS relief applies only to individuals over 18 years of age 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:
- if the investor and the investor's associates' interest in the company exceeds 30%. 'Interest' includes the company's share capital, voting rights or assets on a winding up; or
- if the investor or any of the investor's associates is an employee of the company – note that there is no restriction on being a director of the company.
An investor's associates for these purposes include: spouses, civil partners, children, grandchildren, parents, grandparent 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
- an amount representing all or the majority of the money raised under the SEIS subscription is, in the course of the arrangements, paid to or for the benefit of a person who is party to the arrangements (or a connected person); or
- in the absence of the arrangements, it would be reasonable to expect that the greater part of the investee company's qualifying business activities would have been carried on by a person who is party to the arrangements (or a connected person) as part of another business.
Which companies qualify for SEIS
In order to qualify for EIS relief, the company must:
- exist for the purposes of carrying on one or more 'qualifying trades'; or
- be the holding company of a trading group, provided that it has one or more subsidiaries and the business of the group as a whole does not include a substantial amount of non-qualifying activities.
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 and property development.
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.
Are there any pitfalls I need to be aware of?
SEIS provides very favourable tax reliefs for investors. However, there are some potential hurdles and pitfalls, which include:
- SEIS is not available if there has been previous EIS or VCT investment in the company;
- using an 'off the shelf' company may prejudice SEIS relief – although it was announced in the 2013 Budget that the law will be changed so that this should not be a problem in respect of shares issued on or after 6 April 2013;
- the disqualifying arrangements test is wide and it is not entirely clear what it will catch; and
- CGT exemption for gains reinvested is only available for assets disposed of in 2012/13 and gains reinvested in SEIS qualifying companies in the same year. However it was announced in Budget 2013 that a 50% exemption would be introduced for gains made in 2013/4 and reinvested in SEIS shares in 2013/4 or 2014/5.
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.
SEIS reinvestment relief
An existing 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. Unlike other CGT reliefs (including EIS deferral relief), in order to benefit from SEIS CGT reinvestment relief, only the gain (and not the full proceeds) needs to be reinvested.
It was announced in the 2013 Budget that a 50% CGT exemption would be introduced for gains made in 2013/4 which are reinvested in SEIS shares in 2013/4 or 2014/5. 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.
Rather than investing the full £100,000 gain, John reinvests £80,000 for SEIS shares in 2012/13. He sells the shares in August 2016 for £20,000.
£80,000 of John's 2012/13 gain is CGT exempt and the remaining £20,000 is subject to CGT (subject to any other reliefs or exemptions). He receives income tax relief in 2012/13 of £40,000. In 2016/17, he recognises a capital loss of £20,000 (loss of £60,000 less income tax relief of £40,000).