SEIS Tax Reliefs
To obtain the tax reliefs described below, it is necessary to subscribe for shares in SEIS qualifying companies and claim the relief. The summary below is based on current law, and gives only a brief outline of the tax reliefs. It does not set out all the rules which must be met by SEIS qualifying companies and an investor. The tax reliefs will only be relevant to investors who pay UK income tax and/or wish to exempt a capital gain. SEIS income tax relief for investments made after 05 April 2018 can be claimed in the 2018/2019 tax year, or can be carried back to the 2017/2018 tax year.
(a) Income Tax Relief – 50%
Individuals can obtain 50% income tax relief on the amount subscribed for shares in SEIS qualifying companies (up to an annual maximum £100,000) although relief will be denied for investment into an SEIS qualifying company with which the individual is connected. Spouses and civil partners can each separately subscribe up to £100,000. The relief is given against the individual’s income tax liability for the tax year in which the shares are issued unless the individual makes a Carry Back Relief claim. Relief is restricted to an amount which reduces the investor’s income tax for the year to nil.
(b) Carry Back Relief
Carry Back Relief claims may be made for amounts subscribed for shares in SEIS qualifying companies, such that an investment is treated for tax relief purposes as having been made in the tax year before the tax year in which the investment was actually made, subject to the appropriate limit for that tax year.
(c) SEIS CGT Exemption (SEIS Reinvestment Relief)
If an investor realises a capital gain by disposing of an asset of any kind and invests the gain in shares in an SEIS qualifying company, up to one half of that gain can receive exemption from CGT. It is noted that reinvestment must be within the same tax year.
(d) Capital Gains Tax Exemption
Any capital gains realised on a disposal of Shares in an SEIS qualifying company after the three year SEIS period, and on which SEIS relief (see (a) above) has been given and not withdrawn, will be capital gains tax free. Any capital gains realised on a disposal within the three year SEIS period will be subject to CGT.
(e) Loss Relief against income or gains
Tax relief is available at any time in respect of any loss realised upon a disposal of shares in an SEIS qualifying company on which SEIS income tax relief (see (a) above) has been given and not withdrawn. The amount of the loss (after taking account of any income tax relief initially obtained) can be set against the individual’s gains in the tax year in which the disposal occurs, or, if not fully used, against gains of a subsequent year. Alternatively, on making a claim, the loss net of income tax relief may be set off against the individual’s taxable income in either the tax year in which the disposal occurs, or the previous tax year. If the circumstances are such that SEIS tax reliefs have been withdrawn, it may still be possible for an investor to claim loss relief, for an amount equal to the economic loss sustained, however, the amount of relief would be restricted to the greater of £50,000 or 25% of adjusted total income for Income Tax purposes.
(f) Inheritance Tax – Business Property Relief
Although not an SEIS tax relief as such, an investment in an SEIS qualifying company will normally qualify for 100% relief from IHT under current legislation, provided the investment has been held for at least two years and is still held at time of death. There is no upper limit on the amount of IHT relief which can be claimed.
Date for claiming tax relief
The relevant dates for income tax relief, from a tax year perspective, is the date on which an investment is made into a company. The latest date you can file a claim for SEIS relief is five years after 31 January following the tax year to which the claim relates.
On investment into a company an application on your behalf will be made to HMRC for the SEIS3 certificate in order to claim SEIS relief on your investment. The application to HMRC cannot normally be made until the company has carried on its trade for a minimum of four months or, if earlier, after the company, has spent at least 70% of the money raised through issue of SEIS qualifying shares. Subject to this, SEIS3 certificates are typically sent out to investors within eight weeks of each underlying investment. The SEIS3 certificate enables you to claim your income tax relief and capital gains tax exemption, normally by making the appropriate entries on your own tax return.
SEIS Qualifying Companies
Each company in which an investor invests must initially (i.e. at the time of issue of the shares) not be listed on a recognised stock exchange (as defined for the purposes of SEIS Relief) and there must be no “arrangements” in place for it to become so listed. In addition, throughout the three year SEIS period, it must not be a subsidiary of,
or be controlled by,
It must either exist to carry on a qualifying trade or else be the parent company of a trading group and there must be no “arrangements” in existence for the company to become a subsidiary of, or be controlled by, another company. A trading group is a group in which, directly or indirectly, more than 50% of the shares of each subsidiary are held by another member of the group, but any subsidiary employing any of the money raised by the issue of shares must be a qualifying 90% subsidiary. Non-qualifying business activities (broadly, investment activities and non-qualifying trades) must not comprise a substantial part of the business of the group as a whole. The qualifying business activity for which the money is raised by the issue of shares must be a trade conducted on a commercial basis and with a view to the realisation of profit.
Although it is possible for qualifying activities to be carried on anywhere in the world, the company that issues the shares must have a “permanent establishment” (broadly, a taxable presence) in the United Kingdom.
For SEIS purposes, the value of the gross assets of the company and any subsidiaries must not exceed £200,000 immediately before the issue of shares. Subject to certain exceptions, the maximum SEIS fundraising per company is restricted to an all-time maximum of £150,000 and the maximum number of full-time employees (or full-time equivalent) in the company at the time of Investment is restricted to fewer than 25.
It is not possible for a company to qualify for SEIS relief if it has previously issued shares on which EIS Relief has been claimed, or has issued shares to, or received an investment from, a venture capital trust. If a company issues shares on which SEIS Relief is claimed, it is possible for it to issue subsequent shares on which EIS Relief may be claimed.
Most types of trades are qualifying trades for SEIS purposes but the following are excluded:
- Dealing in land, commodities or futures, or in shares, securities or other financial instruments;
- dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution, or acting as a wholesaler or retailer of goods of a kind which are collected or held as investments if stock is not actively sold;
- banking, insurance, money lending, debt factoring;
- hire purchase financing or other financial activities;
- leasing, except certain lettings of ships, or receiving royalties or licence fees (subject to certain exceptions, most particularly in relation to self-generated intellectual property);
- providing legal or accountancy services;
- farming and market gardening;
- holding, managing or occupying woodlands or forestry or timber production;
- property development;
- producing coal and/or steel;
- operating or managing hotels or similar establishments;
- operating or managing nursing homes and residential care homes;
- generation or export of electricity or power;
- production of gas or fuel; and
- providing services to a trade consisting of any of the above carried on by a “connected person.”
The trade of the company must generally be less than two years old at the time of the investment. Companies “in financial difficulty” cannot receive SEIS investment. HMRC’s guidelines regard a company as being in financial difficulty where it is unable, whether through its own resources or with the funds which it is able to obtain from its owners, shareholders or creditors, to stem losses which, without outside intervention by the public authorities, will almost certainly condemn it to going out of business in the short or medium term.
Shares only qualify for SEIS Relief if they are ordinary shares which do not, at any time during the three year SEIS period, carry any present or future preferential right to dividends (other than to certain fixed rate non-cumulative dividends) or to a company’s assets on its winding up, or any present or future right to be redeemed.
An investor can obtain SEIS income tax relief only in the tax year in which investments in qualifying SEIS companies are made (i.e. the tax year in which the investor invests), or in the immediately preceding tax year.