Briefing document

Introduction

The Seed Enterprise Investment Scheme (SEIS) is intended to help small, start-up companies to raise finance by offering tax reliefs to individual investors who subscribe for new qualifying shares in those companies. The SEIS complements the Enterprise Investment Scheme (EIS). The SEIS offers more generous tax reliefs than the EIS but is only available in respect of investments into much smaller companies than those which qualify for EIS. 

Numerous detailed conditions must be met by both the investor and the SEIS company over a prescribed period for tax relief to be available. Tax advice should always be taken, both on investment and in respect of any changes during the prescribed holding period. 

This briefing note contains an outline of SEIS relief. An overview of the EIS is separately available.

Outline of reliefs available

Provided all the conditions are met over the appropriate time periods, the tax reliefs available include: 

• Income tax relief of 50% on the amount invested into SEIS companies. Income tax relief can be claimed on a maximum investment of £200,000 per annum. Shares can be treated for tax purposes as issued in the preceding tax year, subject to the £200,000 limit in the earlier year.

• Capital Gains Tax (CGT) exemption on disposal of SEIS shares on which income tax relief has been claimed and not clawed back. 

• CGT re-investment relief can apply if income tax relief is claimed. This relief reduces capital gains made on disposal of other assets by 50%. The reduced amount of gain does not subsequently become chargeable so effectively becomes exempt. The maximum gain reduction is £100,000 per annum. The gain must arise in the tax year in respect of which SEIS income tax relief is given (i.e. either in the tax year of investment or the preceding tax year if a carry back claim is made). The remaining 50% of the gain remains chargeable. 

• SEIS shares may also be eligible for relief from inheritance tax after they have been owned for at least two years. This is not part of the SEIS: relief may be available due to overlap with the conditions that must be met for business property relief from inheritance tax to be available. 

Conditions

Detailed conditions must be met by the investor, the company and the shares in order for SEIS reliefs to be available. In addition, the SEIS shares must meet certain criteria. In particular: 

• The company must exist wholly for the purpose of undertaking a qualifying trade, and if the trade has already commenced when the investment is made it must have been ongoing for less than three years. In addition, the company must have objectives to grow and develop its trade in the long-term.

• The company must be unlisted (listing on AIM is acceptable for SEIS purposes). 

• The company must be small, with gross assets of £350,000 or less immediately before the share subscription. 

• In the case of groups of companies, the gross assets of the group must be £350,000 or less immediately before the share subscription and the group must satisfy various conditions. 

• The investor must not own a substantial (more than 30%) interest in the company and must not be an employee (though he or she can be a director). 

• The shares must be new fully paid-up ordinary shares, which do not have any terms which protect the investor from the risk of investing in a SEIS company.

• SEIS relief is only available if, by making the investment, the investor’s capital is put at risk and an overall loss could arise, considering the net investment return, loss of capital and any tax relief obtained.

• These conditions must be met both at the date of the investment and for the three years following the issue of the SEIS shares. If the above conditions are not met throughout the three year period, any income tax relief claimed will be clawed back, the CGT exemption on disposal of the SEIS shares will be unavailable and any gains on disposal of other assets which were relieved using CGT re-investment relief will come back into charge.

Commercial issues

Whilst they are attractive, the tax benefits of SEIS investments are only one point of which a potential investor should be aware. Notably: 

• EIS and SEIS investments carry significant investment risk, so it is essential that appropriate investment advice is taken from an FCA authorised advisor. 

• The initial tax reliefs are only available on subscription for new shares and so there are unlikely to be many potential purchasers of second-hand EIS and SEIS shares. This means that it can be difficult to sell the shares.