SEIS could bring tax relief opportunities of 78%
Continuing with our detailed analysis of the tax planning opportunities that arose following the Budget 2012, we turn our attention to tax efficient investment opportunities. We already have VCTs and EIS, both of which we have covered in detail before. These were further enhanced in the Budget with a new scheme, SEIS (Seed Enterprise Investment Scheme), which is specifically aimed at start up companies.
Tax relief under SEIS started to become available on 6th April this year, although we are currently awaiting Royal Assent, and is expected to be available until at least April 2017. SEIS offers a more tax efficient way to invest in new ventures and, for the business owner, a useful way of obtaining finance for a new venture, up to a maximum level of £150,000.
How SEIS works
SEIS allows anyone who invests up to £100,000 in a tax year in a qualifying company to benefit from 50% income tax relief on the amount they have invested and, depending on their circumstances, to also benefit from full CGT relief. The income tax relief can either be backdated to a previous year or be given for the year the investment is made.
For investors, this represents another way to get 50% tax relief alongside pension contributions.
Qualifying criteria for SEIS
The rules, as relevant for different stakeholders involved in SEIS are as follows:
- The company must be a start up business (incorporated within 2 years of the date on which the shares are issued);
- It must be a UK company, not controlled by another company;
- It must not employ more than 25 workers;
- It must have assets of less than £200,000;
- It must trade in an approved sector;
- Certain industries and types of business are not permitted to raise finance through SEIS, including property development, farming or market gardening and those involved in the leasing industry;
- The total amount of SEIS investments made into the company must not exceed £150,000;
- Investors can invest £100,000 in a single tax year rising to a maximum of £150,000 over two or more tax years into a single company;
- Investors cannot own more than 30% of the company receiving their capital;
- The shares must be held by the investor for 3 years after they are issued;
- In the 2012/13 tax year, investors can roll any gain in the tax year into an SEIS with full capital gains tax exemption;
- Neither the investor nor his associates (e.g. business partners, parents, children) can be an employee of the company at any time from incorporation to 3 years after the shares are issued;
- All of the money raised by the investment must be spent by the company for business purposes within 3 years after the shares are issued;
Our verdict on SEIS
This is a more tax efficient scheme than EIS as 50% income tax relief is achieved; together with full CGT roll-over (i.e. there is no clawback of the gain rolled over when the SEIS shares are sold). However the amounts that can be raised by companies and contributed by individuals are severely restricted, making this scheme applicable for small start up businesses only. For those businesses however, it can help attract very valuable funding for growth in the early years. And although there are quite a few rules to navigate, this is a very useful scheme, which benefits investors and business owners alike.
For more information on investment related tax planning please contact Lesley Stalker by emailing las@rjp.co.uk.
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