To provide a brief summary of the highlights of the SEIS regime:
- Individual income tax relief of 50% of the amount invested (up to a maximum of £100,000 per tax year), with the potential to split the relief between the tax year of investment and the preceding tax year. This applies regardless of the rate of tax at which the individual is taxed.
- Exemption from capital gains tax (“CGT”) on any proceeds of sale of a SEIS investment.
- Exemption from capital gains tax on proceeds of sale of other capital assets during the tax year 2012/2013 if and to the extent that gains from that sale are reinvested in a SEIS company.
- Although a company will not be able to issue SEIS shares if it has previously raised funds under the Enterprise Investment Scheme (“EIS”) or Venture Capital Trust (“VCT”) regimes, it CAN raise EIS or VCT monies after a SEIS funding round, albeit not until the company has spent at least 75% of the SEIS monies raised.
The combination of income tax relief at the 50% rate with the potential to exempt capital gains reinvested in SEIS companies, thus saving up to a further 28% in tax, will make the SEIS regime one of the most significant and attractive tax relief schemes in the UK code.
Further details of the benefits and a discussion of the conditions to obtaining relief are set out below. One or two of the more notable restrictions on relief are detailed here:
- There is a limit of £150,000 on funds that a company can raise under the SEIS (this is NOT an annual threshold).
- The company cannot have raised any previous funding under the EIS or VCT regimes.
- Funds raised under SEIS must be used in a qualifying business activity within three years of the investment (and relief will not be able to be claimed by investors until at least 70% of the money has been spent).
How does the scheme work?
SEIS operates in a similar manner to the EIS, providing income tax and CGT reliefs for individual investors who subscribe in cash for qualifying shares in qualifying companies.
Qualifying shares includes ordinary shares, but also shares that may have certain non-cumulative preferential dividend rights.
For shares issued on or after 6 April 2012, an investor who qualifies for the relief can claim an income tax reduction equal to 50% of the money subscribed, subject to an annual subscription limit of £100,000 (so the maximum income tax saving is £50,000).
Naturally, relief can only be used to the extent that the individual has an income tax liability (it cannot create a loss or a repayment of tax), but investors can also use the tax reduction against their income tax liability for the previous tax year, or can split the reduction between the two tax years.
Where income tax relief is available for an investment in SEIS shares, broadly any capital gain realised on a disposal of the shares will be exempt from tax.
In addition, the Government has announced a “single year” exemption from CGT for proceeds of disposals made in the 2012/2013 tax year and reinvested in SEIS companies during the same period. Although draft legislation has not been released for this specific relief, it has been confirmed that it will not be necessary to reinvest the entire proceeds of any disposal – only an amount of the proceeds equal to the gain (or part of the gain) to be exempted. An example is shown below.