The introduction of Seed EIS (SEIS) is a major break-through for early stage companies seeking funding.
Here are 10 need to know (N2K!) facts for start-up founders on the new SEIS scheme:
- SEIS allows investors in early stage companies to receive 50% income tax relief on investments up to £100,000 per year. So for every £1 invested, HM Revenue & Customs will refund 50p regardless of their rate of income tax!
- SEIS investors will pay no capital gains tax on ultimate disposal of their shares so long as the company remains as a qualifying SEIS company for 3 years. So even if your business turns into tomorrow’s Facebook, the investors will not pay a penny in capital gains tax on ultimate exit!
- There is an added bonus for investors between 6 April 2012 – 5 April 2013 in that they can reinvest any gains crystallised in the year and wipe out the gain completely – so say an individual sold a rental property in the year and realised a profit / gain of £100,000 they would normally be liable to pay up to £28,000 capital gains tax. However, they could reinvest this into a SEIS investment instead and receive 50% income tax relief plus eliminate the taxable gain entirely – this equates to a whopping 78% tax relief or, put another way, a 22p in the £1 investment cost…..!
- Your company must have commenced trading within the past two years to qualify for Seed EIS – remember this is aimed at early stage companies only – and must be unquoted (AIM and PLUS listings count as unquoted for these purposes)
- Companies are limited to raising a maximum of £150,000 under SEIS – after this, they may be eligible for SEIS’s Big Brother, EIS, provided 70% of the SEIS cash has been spent (…!)
- To qualify for SEIS, companies must have less than 25 employees and gross assets of £200,000 or less (before the investment round).
- Early indications were that SEIS would apply to loans to startups as well as subscription for shares but the rules as implemented restrict the relief to subscription for ordinary shares only.
- There are material interest limits (30%), certain trades are excluded and there are a fair few stumbling blocks for the unwary as the rules largely mirror EIS.
- You can obtain advance assurance on whether the company is a qualifying SEIS company from HMRC.
- It applies from 6 April 2012. The legislation states that it will run for 5 years so to 5 April 2017 but hopefully it will be extended.
This is a great opportunity for start-up founders to access much needed capital at a time when traditional sources of bank and grant funding are thin on the ground.
Please drop me a line if you would like some assistance in navigating the SEIS or EIS rules either as a company founder or business angel investor.