Seed Enterprise Investment Scheme – The Germ of a Good Idea?
In April, the government launched a new scheme to help start-up companies attract business finance. Known as the Seed Enterprise Investment Scheme (SEIS), the idea is to give investors a tax break when they invest in new businesses.
The tax break is generous. For investments of up to £100,000 per tax year, the Revenue will give income tax relief of 50% of the sum invested. It does not matter what rate of tax you pay, either. Hence, an investment of £30,000 would reduce your tax bill by £15,000, although it cannot reduce it below zero.
There are two valuable capital gains tax benefits, too, the first being an exemption from tax on the sale of the SEIS shares. There is no limit on this exemption: the entire gain is tax free.
The second CGT benefit is reinvestment relief. If you have made a gain on other assets, such as property, you would normally expect to pay CGT at 18 – 28%. Reinvestment relief allows you to defer tax by reinvesting the gain into SEIS shares. Normally, this only postpones the gain until the SEIS shares are sold. However, gains made in 2012/13 can escape tax completely if they are rolled into SEIS shares in the same tax year.
It is therefore possible to obtain a total of 78% tax relief on a SEIS investment. Is this too good to be true? The ‘catch’ in this case is that SEIS is very tightly targeted at ‘small’ companies starting a ‘new trade’. ‘Small’ in this case means a company with assets totalling less than £200,000 immediately before the investment of capital. A ‘new trade’ is one that started no more than two years before the investment, and it cannot be a business that was previously carried on by the investor at any time. Finally, the company must carry on a qualifying trade, which excludes, among other activities, farming, leasing, hotels, care homes and, naturally enough, accountancy.
There are also conditions attached to the investor. He must introduce his investment in the form of new cash in return for new shares in the company. Capitalising a loan account or buying shares from another shareholder do not qualify for relief. The investor is allowed to hold no more than 30% of the share capital, taking into account shares held by family members. The shares must be held for at least three years and there are detailed rules designed to prevent cash being returned to the investor before the three years are up. The investor is, however, allowed to be a director of the company and to be paid ‘reasonable remuneration.’
These regulations are very similar to those relating to the existing Enterprise Investment Scheme, which offers tax breaks, albeit on a less generous scale, to existing businesses. Under EIS, companies with assets of up to £15m now qualify, with income tax relief given at 30%. But whether either scheme will actually help attract equity finance into small companies remains to be seen.