To qualify for the available reliefs, the investor must not be an employee of the company (but can be a director) and must not already hold a substantial interest in the company. A substantial interest is a holding of more than 30% of the company's issued share capital, or of its voting rights or assets in a winding up. Shareholdings of associates are taken into account when calculating the 30%. Associates include relatives, business partners and trustees of any settlement of which the investor is a settlor or beneficiary.
Qualifying shares must be full risk ordinary shares which have been fully paid up in cash. The shares must have been issued after the 6th April 2012 and be held for a period of three years from the date of issue. However, there must be no pre-arranged exit for the investor to sell the shares at the end of that three year period.
There are limitations on the companies to which the SEIS will apply to. Some of the main conditions are that the company must:
- be a UK company;
- not have been established for more than 2 years before the qualifying shares are issued;
- not employ more than 25 full-time employees;
- have assets of less than £200,000 immediately prior to the investment monies being received;
- carry on a genuine new trading venture and carry on that trade in an approved sector on a commercial basis (property development, retail distribution, hotels, nursing homes and farming will not qualify);
- spend at least 70% of the money raised by the share issue on qualifying business activities within the first three years of the investment (care needs to be taken with research and development expenditure).
Income Tax relief is available for an investor who subscribes for qualifying shares in a company which meets the SEIS requirements. Relief is available at 50% of the cost of the shares which must not exceed £100,000 per tax year, rising to a maximum investment of £150,000 over two or more tax years to a single company.
The relief is given as a reduction against the total tax liability rather than as a tax repayment and any unused relief can be carried back to the preceding tax year if there was an unrelieved tax for that year.
This relief can be withdrawn if at any time during the three years from the date of issue of the shares the investor becomes employed by the company, holds a substantial interest in the company, or if the company loses its qualifying status.
The relief can also be withdrawn or reduced if at any time during the three years from the date of issue the investor disposes of the shares (other than to a spouse or civil partner), or if the investor or an associate of the investor receives value from the company or a person connected from the company.
Further reliefs available:
Capital Gains Reinvestment Relief is only available for the 2012/13 tax year. Where assets are disposed of in 2012/13 and all or part of any gain is reinvested into SEIS shares, the amount reinvested will be exempt from capital gains tax up to a limit of £100,000. The relief can be carried back to the preceding tax year in the same way as with the Income Tax Relief.
Capital Gains Disposal Relief will apply to those qualifying shares which are sold by the investor after 3 years from the date of issue. Any gain from such a disposal is free from Capital Gains Tax.
Additionally, if any capital losses are realised by the investor if the company is unsuccessful and little or no value is returned to the shareholders, the allowable loss will qualify for relief against capital gains or income in the usual way. The capital loss will be reduced by the amount of any Income Tax Relief that has been obtained, so that the Tax Relief is not duplicated.
The SEIS provides a great opportunity for those new businesses that qualify and should be considered as an attractive way to attract funds from private investors at a time when traditional bank finance can be difficult to obtain.
As with the investment in any shares in a private company, particularly a new company or one which has less than two years trading history, the value of the initial investment can go up as well as down. However, if the company is successful, the investor's holding of ordinary shares should benefit from any dividend distribution in the same way as the remaining ordinary shareholders who work in the business and the investor will benefit from any capital growth of the company, in the value of his shares.
Protections can be included in the usual way via a Shareholders Agreement, or amendments to the Company's Articles of Association, so as to ensure that the investor has some control over matters in relation to the company and also to include pre-emption rights, so that in the event of the investor wishing to exit, the remaining shareholders have the first opportunity to purchase his shares after the initial three year period.
Providing these matters are dealt with in accordance with the terms of the scheme, there is no reason why they cannot be implemented at the time of the investment.
If you are an investor attracted by the tax reliefs available under the SEIS scheme, or a company which thinks it may qualify and is looking for investment or if you require assistance with the preparation of the necessary documentation to effect an SEIS investment, please get in touch with one of our corporate solicitors, who will explain the scheme to you in greater detail and guide you through the process as a whole.
By Debbie King, Corporate Lawyer in Lancashire