Seed Enterprise Investment Scheme (SEIS) Tax Examples

The UK government has developed the Seed EIS (or SEIS) to encourage business angels to make very early stage investments into new companies.

The company needs to qualify – that is, be unquoted, less than 25 employees, fewer than £200k of assets; spend all the money invested within 3 years and not be set up for the purposes of avoiding tax,  amongst a few other key points (eg total investment per company must not exceed £150,000 – including any recognised state aid – and each individual investor can own up to – but not greater than – 30% of the equity,  and the shares must be paid for on issue – and hence, not as part of the company registration process).

For more details on SEIS qualification please click here and investor qualification please see here.

However, it has been unclear how the tax rebate would actually work. Well, thanks to some very instructive examples on the HMRC Tax website – which we’ve included below – it should now be clear to everyone.

When discussing SEIS, we normally cover two parts – Income Tax relief – normally described as 50% relief and, for the 2012/13 UK tax year only, a capital gains re-investment relief too.

However, there is a third, critical element, and that is to preserve your right to sell your investment – in 3, 5 or 10 years time – and gain a tax relief on your capital gain.

 

1. Tax reliefs available – Income Tax relief

Income Tax relief is available to individuals who subscribe for qualifying shares in a company which meets the SEIS requirements, and who have UK tax liability against which to set the relief. Investors need not be UK resident.

The shares must be held for a period of three years from date of issue for relief to be retained. If they are disposed of within that three year period, or if any of the qualifying conditions cease to be met during that period, relief will be withdrawn or reduced.

Relief is available at 50 per cent of the cost of the shares, on a maximum annual investment of £100,000. The relief is given by way of a reduction of tax liability, providing there is sufficient tax liability against which to set it. Please note that the relief cannot be set off against the notional tax credit on dividend income, as that tax credit is not recoverable.

Example 1

Jenny invests £20,000 in the tax year 2012-13 (6 April 2012 to 5 April 2013) in SEIS qualifying shares. The SEIS relief available is £10,000 (£20,000 at 50%). Her tax liability for the year (before SEIS relief) is £15,000 which she can reduce to £5,000 as a result of her investment.

Example 2

James invests £20,000 in the tax year 2012-13 in SEIS qualifying shares. The relief available is £10,000, as above. His tax liability for the year (before SEIS relief) is £7,500. James can reduce his tax bill when he chooses to file taxes to zero as a result of his SEIS investment, but loses the rest of the relief available.

There is a ‘carry-back’ facility which allows all or part of the cost of shares acquired in one tax year to be treated as though the shares had been acquired in the preceding tax year. The SEIS rate for that earlier year is then applied to the shares, and relief given for the earlier year. This is subject to the overriding limit for relief each year. Please note that there is no SEIS rate for a year earlier than 2012-13, so there is no scope for carrying relief back before that year.

 

2. Tax reliefs available – capital gains re-investment relief

This relief is for the tax year 2012/13 only. If you dispose of an asset which would give rise to a chargeable gain in 2012/13, and reinvest all or part of the amount of the gain in shares which also qualify for SEIS income tax relief, the amount reinvested will be exempt from capital gains tax. The £100,000 investment limit which applies for income tax relief also applies for re-investment relief. The ‘carry-back’ facility applies for capital gains re-investment relief as it does for income tax relief.

The asset does not have to be disposed of first; the investment in SEIS shares can take place before disposal of the asset, providing that both disposal and investment take place in 2012/13.

The HMRC Capital Gains Manual gives guidance on when an asset is disposed of for CGT purposes, starting at paragraph CG14250.

Example 1

Neela sells an asset in June 2012 for £200,000 and realises a chargeable gain (before exemption) of £80,000.

If she makes qualifying investments of at least £80,000 in SEIS shares in 2012/13, and all other conditions are met, the £80,000 gain will be free from CGT. She does not need to invest the whole £200,000 sale proceeds in order to get full exemption.

Example 2

Benjamin sells an asset in June 2012 for £200,000 and realises a chargeable gain (before exemption) of £80,000.

If he makes qualifying investments of only £20,000 in SEIS shares in 2012/13, £20,000 of his gain will be exempt from CGT and he will be liable to CGT on a chargeable gain of £60,000 on the disposal of the asset in June 2012.

(The remaining £60,000 chargeable gain will still be eligible for any other CGT reliefs that are available, and allowable losses and the CGT annual exempt amount can be set off against it in the normal way).

 

3. Tax reliefs available – capital gains disposal relief

If you have received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for at least three years, any gain is free from Capital Gains Tax.

Please note: if no claim to Income Tax relief is made, then any subsequent disposal of the shares will not qualify for exemption from Capital Gains Tax. 
Examples were taken from the HMRC website which you can visit here.

 

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