Tax planning: Seed Enterprise Investment Scheme (SEIS)

The HMRC have announced a new Seed Enterprise Investment Scheme (SEIS) which applies from 6 April 2012 and offers 50% income tax relief to individuals investing up to £100,000 per year in small businesses. This is not dependent on the individual’s marginal rate of tax and so investors will obtain 50% tax relief and effectively halve their tax bill.

The SEIS scheme is designed to help small business start ups to raise equity finance by offering tax reliefs to investors in order to incentivise them to purchase shares in new UK businesses.  The rules have been designed to mirror those of the Enterprise Investment Scheme (EIS).

Individuals can invest up to £100,000 per year in qualifying companies and start ups are able to raise a total of £150,000 under this scheme.  Investors can be Directors but not employees of the company and cannot hold more than 30% shareholding in order to qualify (including relatives and associates). The SEIS conditions must be maintained for a period of 3 years.

Other conditions are as follows:

• Requirements to be met at the time of issue of the shares

                 Company must be unquoted

                 Less than 25 employees

                 No more than £200,000 gross assets

• Any trade being carried on by the company at the date of issue of the relevant shares must be less than two years old at that date.
• Within three years of the date of the relevant share issue, all the monies raised by that issue must be spent for the purposes of a qualifying business activity
• The relief is given by way of a reduction of tax liability, providing there is sufficient tax liability against which to set it.
• For 2012/13 only, any capital gains that are reinvested in SEIS shares during the same tax year will be exempted from Capital Gains tax.

Whilst investing in small business start ups can be risky, the 50% tax relief offers significant incentive for Angel (or Seed) investors out there.