Seed Enterprise Investment Scheme

The Seed Enter­prise Invest­ment Scheme (SEIS) pro­vides tax relief for indi­vid­u­als pre­pared to invest in new and grow­ing com­pa­nies. It is the junior ver­sion of the Enter­prise Invest­ment Scheme (EIS). Investors can obtain gen­er­ous income tax and cap­i­tal gains tax (CGT) breaks for their invest­ment and com­pa­nies can use the relief to attract addi­tion­al invest­ment to devel­op their busi­ness.

Key features

The key fea­tures of the relief can be sum­marised as fol­lows (fig­ures are those applic­a­ble from 6 April 2024):

• a qual­i­fy­ing investor will be able to invest up to £200,000 into qual­i­fy­ing com­pa­nies in a tax year
• they will receive income tax relief of up to 50% of the sum invest­ed
• unused relief in one tax year can be car­ried back to the pre­ced­ing tax year if there is unused relief avail­able for that year
• the max­i­mum amount that a com­pa­ny can attract in invest­ment qual­i­fy­ing for the SEIS is £250,000 in total
• the com­pa­ny must not have assets of more than £350,000 before any SEIS invest­ment
• an indi­vid­ual who makes a cap­i­tal gain on anoth­er asset and uses the amount of the gain in mak­ing a SEIS invest­ment will not pay tax on 50% of the lia­bil­i­ty, sub­ject to cer­tain con­di­tions
• there is a huge amount of anti-avoid­ance leg­is­la­tion to pre­vent exploita­tion for tax avoid­ance pur­pos­es.

Who can invest?

The offi­cial term is a ‘qual­i­fy­ing investor’. The pri­ma­ry require­ment is that the investor or some­one who is asso­ci­at­ed with them must not be an employ­ee of the com­pa­ny in which the invest­ment is being made. They can how­ev­er be a direc­tor. They must also ensure that they do not have (direct­ly or indi­rect­ly) a sub­stan­tial inter­est in the com­pa­ny. This is defined by ref­er­ence to hold­ing more than 30% of any of the fol­low­ing (in either the com­pa­ny itself or a 51% sub­sidiary of the com­pa­ny):

• ordi­nary shares
• issued shares
• vot­ing rights
• assets in a wind­ing up.

Which shares qualify?

The shares must be ordi­nary shares which have been sub­scribed for whol­ly in cash and are ful­ly paid up. They must be held for a three year peri­od from the date of issue. The com­pa­ny must have issued the shares for the pur­pose of rais­ing mon­ey to fund a qual­i­fy­ing busi­ness activ­i­ty which either involves the car­ry­ing on (or prepa­ra­tions to car­ry on) a new trade. Using the funds to meet the costs of research and devel­op­ment intend­ed to cre­ate or ben­e­fit a new qual­i­fy­ing trade will also be accept­able. The mon­ey must be spent with­in three years of the date of issue of the shares. The anti-avoid­ance require­ment is that there must be no pre-arranged exit for the investor involv­ing the pur­chase of the shares, or the dis­pos­al of assets.

Which companies qualify?

The rules are intend­ed to ben­e­fit new com­pa­nies. The basic require­ments are that the com­pa­ny must be unquot­ed. The trade must be a ‘new’ qual­i­fy­ing trade. This is one not car­ried out by either the com­pa­ny or any oth­er per­son for longer than three years at the date the shares are issued. The com­pa­ny must exist whol­ly for the pur­pose of car­ry­ing out one or more qual­i­fy­ing trades through­out the three-year peri­od from the date of issue of the shares. If the com­pa­ny goes into receiver­ship or admin­is­tra­tion or is wound up dur­ing this peri­od, this will not pre­vent the relief being giv­en, pro­vid­ed there was a com­mer­cial jus­ti­fi­ca­tion for the action.

The oth­er main con­di­tions relat­ing to the com­pa­ny can be sum­marised as fol­lows:

• the com­pa­ny must have a per­ma­nent estab­lish­ment in the UK
• the com­pa­ny must be effec­tive­ly sol­vent at the date of issue of the shares
• the com­pa­ny may have a qual­i­fy­ing sub­sidiary
• the com­pa­ny must not be a mem­ber of a part­ner­ship
• imme­di­ate­ly before the invest­ment, the gross assets of the com­pa­ny plus the val­ue of any relat­ed enti­ty (one that holds more than 25% of the cap­i­tal or vot­ing pow­er in the issu­ing com­pa­ny) must not exceed £350,000
• there are few­er than 25 full-time employ­ee equiv­a­lents in the com­pa­ny and any relat­ed enti­ty
• the com­pa­ny must not have had EIS or Ven­ture Cap­i­tal Trust (VCT) invest­ment before the SEIS shares are issued
• the total amount of invest­ment made under the SEIS in the com­pa­ny must not exceed an aggre­gate of £250,000.

Which trades qualify?

The pri­ma­ry require­ment is that the com­pa­ny must car­ry on a gen­uine new trad­ing ven­ture. There may be a prob­lem if the same activ­i­ties had been car­ried on as part of anoth­er trade. Basi­cal­ly any trad­ing activ­i­ty will qual­i­fy unless it is an exclud­ed activ­i­ty with­in the def­i­n­i­tions used for the EIS. This means that activ­i­ties such as prop­er­ty devel­op­ment, retail dis­tri­b­u­tion, hotels, nurs­ing homes and farm­ing will not qual­i­fy. The trade must be car­ried out on a com­mer­cial basis.

How is relief obtained?

The relief is giv­en as a reduc­tion against the total tax lia­bil­i­ty for the year but can­not turn a tax lia­bil­i­ty into a tax repay­ment. In that sit­u­a­tion the indi­vid­ual would be able to car­ry back the unused relief to the pre­ced­ing tax year for use if there was any tax unre­lieved for that year.

Can the relief be withdrawn?

The short answer is ‘yes’ if cer­tain events hap­pen with­in three years of the date on which the shares are issued. The most obvi­ous event is the dis­pos­al of the shares in that peri­od. There are com­plex rules that will cause the relief to be with­drawn if the investor receives ‘val­ue’ from the com­pa­ny dur­ing this peri­od.

What about the CGT position?

Where shares are sold more than three years after the date on which they are issued, then any result­ing gain is free of CGT. Shares sold with­in three years would be charge­able but may qual­i­fy for Busi­ness Asset Dis­pos­al Relief (BADR) if the var­i­ous con­di­tions are met.

Where a dis­pos­al is exempt for gains pur­pos­es, this would nor­mal­ly mean that a loss would not be allow­able for CGT pur­pos­es, but an allow­able loss is avail­able under the scheme. Where SEIS income tax relief has been obtained and is not with­drawn then the cap­i­tal loss is reduced so that tax relief is not dupli­cat­ed.

A bonus exemption

There is also an addi­tion­al exemp­tion where assets are dis­posed of at a gain in that year and funds equal to the amount of the gain are invest­ed in SEIS shares. Rein­vest­ment relief is avail­able at 50% of the matched gain where the pro­ceeds are invest­ed in SEIS shares.

Where only part of the gain is invest­ed in such shares then only that part is exempt. The max­i­mum gain to be relieved is capped at £200,000. Fur­ther, this relief will only be allowed where the invest­ment also qual­i­fies for income tax relief and a claim is made. If for any rea­son the SEIS relief is with­drawn on the shares then the gain will be rein­stat­ed.

Comparison to EIS

The SEIS sup­ple­ments the EIS. Some aspects of both schemes are sim­i­lar but there are also key dif­fer­ences. These are not con­sid­ered in detail here, how­ev­er, con­sid­er the posi­tion of the indi­vid­ual investor. Under the EIS those invest­ing up to £1 mil­lion receive income tax relief at up to 30%. From a tax relief per­spec­tive on invest­ments up to £200,000, the SEIS is more favourable but it clear­ly can­not be used for larg­er invest­ments.