The Seed Enterprise Investment Scheme: SEIS the day!
The Seed Enterprise Investment Scheme(SEIS The Day!)
Introduction• Jonathan Lea• @jonathanlea• http://jonathanlea.com
What is SEIS?• SEIS offers investors generous tax reliefs for investing in startups and early stage ventures• Introduced in December 2011 to take effect from 6 April 2012 (subject to the formality of Royal Assent in July 2012)
Why SEIS?• The equity gap• Develop culture of investing in startups, innovation and entrepreneurship• Bank lending
Tax Reliefs• 50% income tax relief• Complete exemption from CGT on disposal• Capital gains re-investment relief worth 28% in the first year (2012/13 only) of the Seed Enterprise Investment Scheme• Loss relief if investment fails• Inheritance tax relief after two years• Unused relief in one tax year can be carried back to the preceding tax year if there is unused relief available for that year• Once at least 70 per cent of the monies raised by the SEIS issue are spent, the company can raise additional funds by taking advantage of the EIS regime or investment from a Venture Capital Trust.
The SEIS Rules Investors Companies• Shares must be paid in full when • Max investment is £150,000 (maximum annual investment of £100,000). issued • The company must not have previously• You must not have ‘substantial received investments under the EIS or interest’ in the company VCT schemes • Any trade being carried on by the• Neither you nor any of your company at the date of issue of the associates may be employed by the shares, must be less than two years old company • UK resident (or have a UK permanent establishment)• You must satisfy the criteria for three • Fewer than 25 full time employees entire years from the issue date • Assets of not more than £200,000 • Investment must be spent for the purposes of a qualifying business activity within 3 years of the investment (all of the money) • Qualifying shares
Example 1Jane invests £50,000 under the SEIS in the tax year 2012/13. Janeworks out her annual income then calculates how much tax shehas to pay taking into account her personal allowance, whichresults in an income tax liability of £40,000. After three yearsJane sells the SEIS shares for £75,000.By claiming the 50% SEIS Relief on the £50,000 invested, herincome tax liability is reduced by £25,000 from £40,000 to£15,000. She therefore holds an investment worth £50,000 at thetime of investment which has only cost her £25,000. Any capitalgains on this investment after 3 years will be capital gains taxfree, saving tax again then. After three years Jane sells the SEISshares for £75,000. There is no capital gains tax to pay, saving£7,000. Jane’s investment which had a net cost to her of £25,000has returned her £75,000 after tax – 3 times her net cost.
Example 2Stephen invests £25,000 under the SEIS in the tax year 2012/13. Hisincome tax liability for the year is £35,000. He also expects to realise acapital gain of £25,000 on the disposal of some shares in companieslisted on the stock exchange. The shares are sold after 3 years for£50,000.By claiming SEIS Relief and SEIS Reinvestment Relief Stephen reduces hisincome tax liability by £12,500 to £22,500, and he saves capital gainstax of £7,000. In total he saves £19,500 in tax by investing £25,000under the SEIS, making the net cost of his £25,000 investment just£5,500.Under SEIS, Stephen does not have to pay capital gains tax on the gainof £25,000 saving Stephen a further £7,000. His post-tax return on a£25,000 investment under the SEIS which cost him £5,500 after theinitial income tax and CGT reliefs, is £50,000 – or more than 9 times hisnet cost.
Example 3Joseph invests £20,000 under the SEIS in the tax year 2012/13. Hisincome tax liability for the year is £20,000. He also expects to realise acapital gain of £20,000 on the disposal of a buy-to-let property.Unfortunately Joseph’s investment was not successful and had to bewritten off entirely.He saves a total of £15,600 by investing £20,000 under the SEIS, makingthe net cost of his investment only £4,400 of which he holds sharesworth £20,000 at the time of investment. Joseph may still however savemore income tax by claiming share loss relief on the amount of hisinvestment after deducting income tax relief already received. In thiscase he has already received £10,000 in SEIS Relief i.e. 50% of hisoriginal investment of £20,000 so he may claim loss relief on theremaining £10,000. At the time of the loss claim his tax rate is45%, giving him £4,500 in further income tax relief. Overall despite theunsuccessful outcome of the investment, Joseph’s £20,000 has beenmore than covered by the savings he has in income tax and capital gainstax which add up to £20,100.
Procedure for using SEISHMRC assistance in advance of an issue of sharesAdvance assurance facility for SEIS - allows companies to submit details of their plansto raise money, their structure and their activities in advance of an issue of shares,so that the SCEC can advise on whether or not the proposed share issue is likely toqualify for relief.Form SEIS (AA): company details, how much being raised, what used for, attachdocuments such as company accounts, latest draft of business plan to be issued toinvestors, articles of association, subscription agreementHMRC officer will need to be satisfied that the company is a qualifying company, theshares will be eligible shares, the shares will be issued to raise money for a qualifyingbusiness activity and the company satisfies the rules of the schemeThe onus is on the company to provide all relevant and accurate information anddraw attention to any issues which they are not clear meet the schemerequirementsCompanies are not required to obtain such an assurance
Formal company approval following an issue of sharesBefore investors can claim any tax relief, the company must complete formSEIS 1Declaration that at the time of completion, the company has already metthe requirements of the scheme to the extent that those requirementshave to be met at the time of issue of the shares and to the date of thedeclaration; and that it expects to meet all other requirements.The company cannot submit an SEIS1 until either it has been trading for atleast four months; or if not yet trading, it has spent at least 70 per cent ofthe monies raised by the relevant issue of sharesIf the SCEC accepts that the company, its activities, and the shares all meetthe requirements of the scheme, it will issue the company with a certificateto that effect, and will supply claim forms (SEIS3s) for the company to sendto the investors so they can claim tax relief.
Qualifying Business ActivitiesA qualifying trade is one which is conducted on a commercial basis with a view to the realisationof profit.A trade is not a qualifying trade if it consists of certain activities, or if such activities amount, inaggregate, to a ‘substantial part ‘ (generally no more than 20%). Excluded activities are: dealing in land or property development dealing in commodities or futures, shares, securities or other financial instruments, banking, insurance, money lending, debt factoring, hire purchase financing or other financial activities Leasing, including the letting of assets on hire receiving royalties or licence fees (subject to waivers, principally that company created the IPR) providing legal or accountancy services farming and market gardening activities concerned with forestry and timber production shipbuilding coal production steel production operating or managing hotels and similar establishments operating or managing nursing homes and residential care homes
Completing a SEIS investment• Business plan, executive summary, pitch presentation• Term sheet• Due diligence• Investment agreement, Shareholder resolutions, Board minutes, SH01 form (statement of capital), Share certificate, update company books
Where to find SEIS investors?• SEIS seed funds like Ascension Ventures and Jenson Solutions• Angel investor networks like Angel’s Den and London Business Angels• Equity crowdfunding portals like Crowdcube and Seedrs