SEED EIS

Date: April 26, 2012

One item announced in the Budget on 21 March which may be of particular interest is the SEIS. Our Square Circular newsletter in February previewed the SEIS but now that the announcement has been made here’s a bit more flesh to put on the bones.

WHAT’S IT FOR?

It’s designed to help small early-stage companies to raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies.

It complements the existing Enterprise Investment Scheme (EIS) by offering the tax relief to investors in companies which are smaller than the typical EIS company. Tax relief is offered at a higher rate than that offered by the existing EIS although the amounts which you can invest are not as large as with the EIS.

WHO IS IT FOR?

It’s not for someone who wants to invest in starting up their own company. There are restrictions on how much of a stake you can hold in the SEIS company. But your investment doesn’t have to be in a company run by a total outsider. A typical scenario might be an investment in the company of a friend or relative, such as a youngster wanting financial help to climb the entrepreneurial ladder.

WHEN DOES THIS START?

SEIS applies to shares issued on or after 6 April 2012.

SO, WHAT IS THE TAX RELIEF?

If you subscribe for shares in a SEIS company you get relief at 50% of the cost of your shares on a maximum annual investment of £100,000. You get the relief as a reduction in your tax liability as long as you have sufficient liability to absorb the relief. You don’t get any refunds or credits. So if you have a tax liability of £10k and SEIS relief of £15k, the surplus £5k is lost.

AND THAT’S NOT ALL!

If you’ve received income tax relief on the cost of the shares as a qualifying SEIS investment and the shares are disposed of after at least three years, any gain is free of CGT.

AND THERE’S A SPECIAL OFFER!

This applies to the tax year 2012/13 only. If you dispose of an asset which gives rise to CGT in 2012/13 and you reinvest all or part of that gain in SEIS shares which qualify for income tax relief, the amount re-invested will be exempt from CGT.

WHAT ABOUT THE SMALL PRINT?

That’s what you need us for. Since the SEIS is the son of the EIS there are all kinds of qualifying conditions. Like father, like son. Here’s a brief taste.

The SEIS company has to carry on a qualifying trade. Certain trades are specifically excluded. For example dealing in land, dealing in shares, property development, farming, legal and accountancy services, money-lending are all a “no no”.

The company mustn’t be quoted, must have fewer than 25 employees, must have no more than £200,000 in gross assets, may not receive more than £150,000 in total under the scheme and there are rules about the money having to be spent for the business activity within a specific time frame.

This is rather a simplification because there are other conditions as well. The only other specific matter we would mention is that your stake in the company must be less than 30%.

CONCLUSION

The first S in SEIS says it all. It’s for fledgling seed companies. The figures aren’t astronomical but the tax relief on the small amounts is generous. Remember, it’s 50% relief on your investment whatever your rate of tax is and if you take advantage of the 2012/13 CGT exemption on gains which would potentially be taxable at 28% that adds up to 78% tax relief. It’s not for a company which you control but if you’re asked to take a back seat or even a managing role in the company of a friend or relative it could be of interest.