Seed Enterprise Investment Scheme (SEIS)
What is it?
The Government introduced Seed Enterprise Investment Schemes (SEIS) in 2012 to encourage people to invest in early stage companies. The legislation is designed to help such companies, usually start-ups, raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
Unlike Venture Capital Trusts (VCTs), SEIS are not quoted on the stock exchange.*
The main conditions for gaining SEIS relief are as follows:
- Tax relief is given to qualifying individuals who subscribe for eligible shares in a qualifying company.
- A qualifying individual is someone who is not connected with the company when subscribing, although in some circumstances they can subsequently become a paid director of the company. Connected is where the individual controls the company or they and their spouse/civil partner, certain relatives and associates own more than 30% of the share capital or voting rights.
- A non-UK resident is eligible, but can only claim tax relief against his or her liability to UK income tax.
- Eligible shares are new ordinary shares.
- A qualifying company must be unlisted when shares are issued, and must have no arrangements at that time to become a listed company. It must have a permanent establishment in the UK. Gross assets cannot exceed £200,000 before the share issue. A maximum of £150,000 of SEIS funding can be raised across any 3 year period ending with the investment then being made. The company or any subsidiary cannot have previously received EIS or VCT funding. The company must have fewer than 25 full-time employees at the time the shares are issued.
- Most trades qualify but there are a number of excluded activities including land and property development, hotels, nursing homes, farming, forestry, companies whose activities are mostly involved in financial services or related activities and now energy generation.
- To gain freedom from income tax relief claw back, the investor must hold the shares for at least three years from the later of the date of issue, or the date the qualifying trade begins.
The minimum lump sum is normally £10,000. The maximum investment that can qualify for income tax relief is £100,000 per tax year.
* Please note, whilst the tax regulations refer to Seed Enterprise Investment Schemes as “Funds” they should not be confused with mutual funds or collective investment schemes. An investor in an SEIS fund will be the owner of shares in the underlying companies, rather than owning shares or units in any fund.
The tax position on SEIS investment is broadly as follows:
- The initial investment qualifies for up to 50% tax relief on investments up to £100,000 in a tax year (subject to maximum relief equal to the amount of your income tax liability for the tax year). There is a ‘carry back’ facility which allows all or part of the cost of shares acquired in one tax year to be treated as though they had been acquired in the previous tax year. Relief is then given against the Income Tax liability of the previous year rather than against the tax year in which those shares were acquired. This is subject to the overriding limit for relief for each year.
- In relation to SEIS investments where income tax relief has been given, gains made are free of capital gains tax.
- Losses are allowable on SEIS investments where income tax relief has been claimed, although a deduction is made for the 50% income tax relief. Such losses may be offset against income instead of capital gains in the year of disposal, or the previous year. In the example of a shareholder who received 50p of income tax relief at outset on an £1.00 SEIS share that subsequently becomes worthless, if they are a 45% income tax payer in the year the share is written off this 50p loss can be set against income and a further 22.5p in tax relief received. This would result in a maximum loss of 27.5p of the £1.00 invested.
- The payment of tax on a capital gain on another asset can be reduced where the gain is invested in shares of an SEIS qualifying company. Tax on the gain is reduced to 50% of the rate otherwise payable, so for example 14% (or 10%) down from 28% (or 20%) for higher rate taxpayers; 7% (or 5%) reduced from 14% (or 10%) for basic rate taxpayers. To benefit from this Capital Gains Reinvestment Relief the chargeable Capital Gain must have arisen either in the year the SEIS shares are issued, or the previous year, and the income tax claim must also apply to the same year. So for a capital gain arising in 2016/17 both the income tax relief and Capital Gains Tax Reinvestment Relief must apply to 2016/17. Alternatively, gains in 2015/16 can be reduced with SEIS shares issued in 2016/17, but the income tax relief must also be claimed against 2015/16.
- Inheritance Tax – SEIS shares will usually qualify for 100% Business Property Relief after 2 years’ ownership and are thus outside the shareholder’s estate for Inheritance Tax purposes, as long as the SEIS shares are owned by the individual at the time of death.
Generally there is little or no liquidity in SEIS companies or funds. SEISs are investments in individual unquoted companies and SEIS funds can consist of as few as four unquoted companies. Shareholders are normally locked into the investment with no means to dispose of the shares, until the company directors or fund managers achieve an exit (e.g. wind-up, quoted market flotation, trade sale or share buy-back). Rarely if at all will a company/fund offer a ‘share buy-back’ facility which may be a factor worth considering for the prospective investor. It would be prudent to view these investments as medium to long term.
Guaranteed exits are not permitted under the SEIS rules.
There are a number of risk considerations that need to be taken into account. It is important that you are aware of these in relation to your particular circumstances.
Please refer to the individual fund prospectuses for both specific risks and some risks generic to SEIS investments. Some risks associated with such an investment are restated below; however you should be aware that this may not be an exhaustive list.
- The underlying investments of SEIS are in very small companies; the failure rate of such companies is significantly higher than that of larger companies.
- SEIS shares are illiquid and therefore not as easy to sell as investments such as “blue chip” companies. In addition a portfolio of investments of unquoted companies involves a higher degree of risk than a portfolio of investments with a full stock market listing.
- The value of shares of SEIS can fluctuate and investors may not get back as much as they invested. There is no guarantee that the market price of the SEIS shares will fully reflect the underlying net asset value of the fund.
- SEIS are higher risk investments and investors may lose all of the capital invested.
- Dividends are not normally paid.
- The investment into SEIS should be considered a long term investment – whilst most funds will make a strategic decision on exiting the investments after the initial three years, this may not be immediately possible and there may be a delay in returning proceeds to investors.
- Past performance of the fund or manager is no guarantee of its future performance.
- The fund may receive conventional venture capital rights in connection with some of its investments. However as a minority investor, it may not be able to fully protect its interests.
- When the fund is realising investments in small unquoted companies it may be difficult and take considerable time. There may be some constraints on realisation in order to maintain the tax status of the fund.
- A SEIS fund has to meet qualifying criteria in order to benefit from tax relief and exemptions. There is no guarantee that the qualifying status will be maintained even if it is granted initially. This would mean the investor becoming liable for tax on dividends and capital gains and may mean that tax relief already paid would have to be returned. Understandably this is a major issue for the SEIS managers and all funds considered for recommendations will take independent advice to ensure they maintain qualifying status.
- SEIS investments can be accessed as managed portfolios in which underlying investments may be bought and sold. Potential tax reliefs and deferrals available on entry and while holdings are maintained may be complicated. Disposals should be made in a considered manner and advice should be sought if there is any doubt as regards the consequences of the disposal.
- There may be no cooling off / cancellation period once the investment house has received your application form and funds.
- A disposal of shares within three years of purchase would require the investor to repay to HMRC any income tax relief previously claimed in respect of their investment.
- Future legislative changes cannot be anticipated, nor the effect such changes may have on the value of investments.
- If income tax relief is not given on your investment or is subsequently withdrawn, if upon realisation your total gains (from all sources) less any allowable losses are greater than your annual Capital Gains Tax allowance, the proceeds will be subject to Capital Gains Tax.
- Whilst we will always attempt to offer a reasonable expectation of the likely timeframe for clients to receive the eligible tax reliefs, this will be dictated by various factors, including but not limited to the date of issue of share certificates, the commencement of trading date and the processing of such reliefs by HMRC.
For a detailed list of the relevant risk warnings, please refer to the ‘Risk Factors’ reference vcSEIS060217.