By Adrian Walton, Corporate Tax Partner at Smith & Williamson
Forgive us for banging the drum, but the tax breaks offered by the Seed Enterprise Investment Scheme (SEIS) should not be ignored. Adrian Walton explains…
The SEIS is available to early-stage companies who wish to raise seed funding for their businesses. From 6th April 2012, both businesses and investors can benefit from this generous relief, with the tax breaks making it easier for businesses to raise the money they need.
The basic provisions of the SEIS enable a company to raise up to £150,000 under the scheme. Investors, on the other hand, can invest a maximum of £100,000 to get the benefits of the relief. There are many rules and bear-traps to be considered but broadly this means that a company can raise its maximum SEIS funding from as few as two investors.
For investors, individuals can obtain income tax relief at 50% for equity investments in SEIS qualifying companies and avoid a capital gains tax liability on any profit made on a sale of their shares, once held for at least three years. The individual must subscribe cash for newly issued ordinary shares, fully paid up at the time of issue, and he (together with his associates) must not own more than 30% of the equity or voting rights in the company. If the investment goes wrong, loss relief against capital gains or income is available, improving the investors position.
For the 2012/13 tax year only, an individual can realise chargeable gains of up to £100,000 on any asset disposed of in 2012/13 and reinvest the gain (or part of it) by subscribing for shares in an SEIS company, and avoid capital gains tax altogether on those gains.
The combination of loss relief and exemption from capital gains tax on other disposals of assets makes investinga very attractive proposition for potential SEIS investors in terms of mitigating risk for their investment, which can be illustrated as follows:
Assume that an individual disposes of a chargeable asset in 2012/13 realising a gain of £100,000 and reinvests it by subscribing for SEIS shares in a qualifying company in 2012/13, and that the investment proves worthless.
Initial income tax relief at 50% £50,000
CGT saved on exempt gain at 28% (assuming entrepreneurs’ relief not available) (Note 1) £28,000
Income tax relief on loss of investment (£100,000 - £50,000) x 45% (Note 2 ) £22,500
Tax benefits £100,500
Note 1: the disposal giving rise to the gain does not have to occur before the SEIS investment is made, but both must take place in 2012/13
Note 2: assumes individual pays income tax at the reduced top rate of 45% from 2013/14
As can be seen from this example, an individual can lose all of his money on an SEIS investment, and claim tax benefits of £100,500 for his £100,000 investment, ie, in these circumstances he cannot lose.
One word of caution is that HMRC’s view is that the income tax loss of £22,500 in the above example would be subject to the cap on total income tax reliefs claimed by individuals proposed to apply from 2013/14. This cap is proposed to be the greater of £50,000 or 25% of the individual’s income for the relevant year. The consultation period in relation to the proposed introduction of the income tax relief cap ended on 5 October 2012 and draft legislation is expected in the next couple of months.
For further information on SEIS please contact Adrian Walton on 020 7131 4180, or email firstname.lastname@example.org.
By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.
Smith & Williamson LLP
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.A member of Nexia International.
The word partner is used to refer to a member of Smith & Williamson LLP.