What is SEIS?
SEIS stands for Seed Enterprise Investment Scheme, and this is a venture capital scheme that offers tax reliefs to investors, to encourage them to invest in start up companies where the funds will be used to grow and develop the business. These are high risk investments where a return cannot be guaranteed. There are certain criteria that need to be met by both the company and the individual investors to qualify.
Company Conditions
For the company to qualify it needs to meet the following criteria:
- Have a permanent establishment in the UK (e.g. incorporated in the UK or has a branch for a foreign entity)
- Not trading on the stock exchange at the time of share issue
- Is not controlled by another company (i.e. more than 50% of the shares are owned by another company) and has not been since incorporation
- Does not own shares in subsidiaries, other than qualifying subsidiaries. A qualifying subsidiary is one where the company owns more than 50% of the shares and no one other than your company or another qualifying subsidiary in the group can control the entity.
- Does not have gross assets over £350,000 at the date shares are issued. If part of a group, this applies to the total group assets.
- Has less than 25 full-time employees at the date the shares are issued. If part of a group this applies to all employees in the group.
- Conducts a new qualifying trade and if part of a group, the majority of the group’s activities are qualifying trades.
- Has not been carrying out the qualifying trade for more than 3 years. This applies to both the company itself and any other party where this has then been transferred to your company.
- Has not received EIS or VCT investment prior to the issue of the SEIS shares.
Non-qualifying Trades
This is a list of the non-qualifying trades for SEIS purposes. Please inform us if your company conducts any of these trades or an entity in the group is conducting these activities, where we do not act for this company. There are certain details for each of these non-qualifying trades that we will need to assess before determining whether a company could qualify for SEIS.
- Coal or steel production
- Farming or market gardening
- Leasing activities
- Legal or financial services
- Property development
- Dealing in land, shares or other financial instruments
- Running a hotel
- Running a nursing home
- Generation of energy, such as electricity and heat
- Production of gas or other fuel
- Exporting electricity
- Banking, insurance, debt or financing services
Limits on funds raised – Company
The maximum value a company can raise under the SEIS scheme is £250,000. This includes any other de minimus state aid received in the 3 years prior to the date of investment.
The funds must be spent within 3 years of the investment and should be used for growth and development of the business.
Risk to Capital Condition
Under SEIS there is a risk to capital condition that must be met by the company for the investments to be eligible. The shares allotted cannot be redeemable and cannot carry special rights to assets. When issuing the shares there cannot be arrangements to protect the investor from risk, sell their shares at the end of the investment period (3-year period) or to invest the funds in the investor’s company. The shares also cannot be structured with preference rights over other shareholders.
Investor conditions
Investors will not be eligible for SEIS relief if they fall under any of the following:
- Employed by the company or a subsidiary in the group. This applies for at least 3 years from the date of investment and includes associates. Associates are individuals in your direct bloodline (parents, grandparents, children, grandchildren) as well as your spouse or civil partner and business partners. If the individual is a director, then they are not treated as an employee for SEIS investment purposes.
- Hold more than 30% of the company’s shares, rights to assets and/or voting rights. This includes the individuals associates.
- Already hold shares in the company which are not founder shares and are not SEIS or qualifying.
Limits on funds raised – Investor
The maximum value an individual can invest under the SEIS scheme is £200,000 per tax year.
Investor benefits
Under SEIS there are many benefits the investor can receive and these are detailed below.
- Income tax relief of 50% on the investment value.
- Capital gains tax exemption when selling the shares if they have been held for more than 3 years.
- Capital gains reinvestment relief where the funds have been reinvested in qualifying SEIS shares.
- Exemption from inheritance tax provided the shares have been held for at least 2 years and certain conditions are met at the point of transfer.
- Loss relief against income or future capital gains where a loss is generated from the sale of the shares.
Please contact the DRG Tax Department if you would like to discuss any of the above or check whether your company may qualify for the Seed Enterprise Investment Scheme.
