Providing all conditions are met, SEIS enables an investor to claim Income Tax relief worth up to 50% of the amount invested in SEIS qualifying shares. This is up to a maximum investment limit of £100,000, so the maximum Income Tax relief available is £50,000.
If you receive this Income Tax relief on the cost of shares and you dispose of these shares after holding them for over three years, any gain you make can be free from Capital Gains Tax.
Finally, SEIS can also enable a person who has made a gain which is subject to Capital Gains Tax (CGT) to gain relief from that CGT by re-investing their profit into SEIS qualifying shares. For a sale and re-investment in the tax year 2012-13, 100% of the amount re-invested can be exempted from CGT, while for a sale and re-investment in 2013-14, 50% of this amount can be exempt.
There is a £150,000 limit to the funds that can be raised by a company under SEIS; note that this is a cumulative and not an annual threshold.
The company hoping to take advantage of SEIS cannot have previously raised any funding through EIS or a Venture Capital Trust (VCT). However, it is worth noting that you can raise funds under EIS or VCT after doing so through SEIS, so long as the company has spent at least 75% of the SEIS funding raised.
SEIS funds must be spent on a qualifying business activity within three years of investment, and relief will not be available to investors until 70% of the SEIS funds have been spent.
In order for a Company to qualify under this Scheme, it must satisfy certain requirements similar to those under EIS. These include:
Gross assets: Must not exceed £200,000
Number of employees: Must be fewer than 25. This figure is deemed to apply to all companies within a group
Unquoted: The Company's shares must not be listed on any stock exchange (excluding the AIM or PLUS markets), or have any arrangements to become listed, at the time of issue of the shares
Trading period: Must not have exceeded 2 years at the date of issuing the relevant shares. (Note, there is no requirement for the company to have begun trading before issuing the relevant shares)
No previous investments: From any Venture Capital Trusts or under EIS
Permanent establishment: the company must have a permanent UK establishment or be resident in the UK
Within three years of the date of issuing the relevant shares, all the funds raised must be spent for the purposes of a qualifying business activity. If this condition is not met, investors will not be able to claim tax relief. A qualifying business activity is either:
- carrying on a new qualifying trade (new being defined as within two years of issuing of shares)
- the activity of preparing to carry on a new qualifying trade which the company intends to, and begins to carry on
- carrying on research and development which will lead to or benefit a new qualifying trade
A “qualifying trade” is one conducted on a commercial basis with a view to realising a profit. For the purposes of SEIS, most trades will qualify but there are notable exceptions, including:
- dealing in land, in commodities or futures in shares, securities or other financial instruments
- dealing in goods, other than in an ordinary trade of retail or wholesale distribution
- financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities
- leasing or letting assets on hire, except in the case of certain ship-chartering activities
- receiving royalties or licence fees (though if these arise from the exploitation of an intangible asset which the company itself has created, that is not an excluded activity)
- providing legal or accountancy services
- property development
- holding, managing or occupying woodlands, any other forestry activities or timber production
- operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment
More excluded trades can be found on the HMRC website.
A person qualified to claim the relief offered by SEIS must also fulfil certain conditions, again like EIS. These include:
Fully paid up shares: shares must be paid up in full at date of issue and subscribed to that person (or a nominee)
Shareholding: The shares must be held for three years for the relief to apply
No “Substantial Interest”: the person cannot own more than 30% of the company’s issued share capital. Shareholdings of associates are included in this, which includes business partners, trustees or relatives.
Employment: the person cannot be employed by the company at the date of issue of the relevant shares or within three years of the date of issue. For the purposes of SEIS, directors of a company are not treated as employees.
Relief under SEIS may be reduced or withdrawn within three years of the date of issue of the relevant shares in certain circumstances. Full details of this are available the HMRC website.