Investors in higher-risk smaller companies have benefitted for a number of years from the Enterprise Investment Scheme (EIS). The new SEIS is targeted to provide funding for early stage companies who may find it difficult to raise seed capital. Recognising these needs, the SEIS scheme also offers investors higher tax breaks than the existing EIS. The SEIS applies to shares issued on or after 6 April 2012.
The following tax reliefs are available to qualifying investors:
Income Tax
• Relief is available to individuals who subscribe for qualifying shares in a company that meets the SEIS requirements.
• Investors need to have a UK tax liability against which the relief can be set.
• Relief is available at 50% of the cost of the shares on a maximum annual investment of £100,000.
• Relief is limited to the total tax liability of an investor in a year of assessment.
• Surplus relief can be carried back to a previous year but no relief can be carried back prior to 2012-13, the first year that SEIS applies.
Capital Gains Tax (CGT) – reinvestment relief
If chargeable gains arise for an individual in the tax year 2012-13 they can be reinvested in the SEIS scheme and the amount reinvested will be exempt from any CGT charge. The £100,000 SEIS investment limit and the carry-back facility also apply to this relief in exactly the same way as income relief.
The chargeable asset does not need to be disposed of first. As long as the CGT disposal and SEIS investment occur in the tax year 2012-13, reinvestment relief can be claimed.
Individuals who pay Income Tax at the highest rates can potentially claim a 78% tax break from claiming SEIS and the associated CGT reinvestment reliefs for 2012-13.
Capital Gains Tax (CGT) – disposal relief
Individuals who have claimed Income Tax relief on an SEIS investment, and the shares are kept for at least three years, will be exempt from CGT on any gain on disposal.
Note that if an investor did not claim Income Tax relief on the original investment, then any gain on subsequent disposal at any time will be subject to CGT.
Investment requirements
One of the key investment requirements is that shares to be included in SEIS must be paid up in full, and in cash, when they are issued.
According to HMRC, one of the most common reasons that an SEIS claim is refused is where investors take up subscriber shares when a company is set up, but before the company has banking arrangements in place to accept payment.
There are also a number of other “qualifying” criteria that need to be met. It is not possible to outline them all in this short article. Please contact us if you would like to explore this investment opportunity for your company.