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The schemes are similar, with the SEIS more focused on very early-stage companies. There are strict rules for both companies seeking investment as well as for the taxpayers investing in an SEIS or EIS share issue.
Both the EIS and SEIS regimes require long-term investments and there is a minimum shareholding requirement of 3 years.
In general, the EIS / SEIS schemes should only be considered by sophisticated investors who are comfortable holding fairly illiquid assets for at least 3 years. The 3-year holding period for shares subscribed for under the EIS / SEIS regimes is the minimum holding period and investors may need to have an even longer-term outlook.
There can be a complete withdrawal of any tax reliefs attributable to shares if, by reason of some event, any of the conditions for the EIS / SEIS relief ceases to be satisfied.
It is very important that businesses looking to raise finance using either the EIS or SEIS schemes ensure that they qualify. Otherwise, investors will be unable to claim the promised tax reliefs. HMRC offer an ‘advance assurance’ service for both schemes that help ensure everything is in order before raising finance.
After the EIS / SEIS share issue, both the investor and the investee must meet certain qualifying requirements to ensure that tax relief is available. This is required in order to benefit from Income Tax and Capital Gains Tax (CGT) reliefs.
Income Tax relief is given at the time of investment. However, if the shares are not held for the 3 years from the date of issue Income Tax relief can be withdrawn or reduced. This applies unless the disposal was to a spouse or civil partner, in which case the spouse or civil partner is deemed to have subscribed for the shares in question.
There are complicated rules relating to the timing of transferring assets before, during or after a divorce so tax advice should be sought as soon as possible.
Capital Gains Tax
In addition, there are 2 CGT reliefs available within the EIS / SEIS regimes where an investor meets the qualifying conditions including holding the shares for at least 3 years. The investor must have received EIS / SEIS tax relief in full on the whole of their subscription for the EIS / SEIS shares and none of the Income Tax relief must have been withdrawn.
The two reliefs are:
- CGT disposal relief on qualifying gains earned on shares held for a minimum of 3 years. If disposal relief is due then an investor will not have to pay CGT on any gain made on a disposal of their EIS / SEIS shares;
- CGT deferral relief where a gain from the sale of an asset is used to make a qualifying investment in shares issued by a company that qualifies for EIS / SEIS. Again, the shares must have been held for a minimum of 3 years.
There are also rules the investee must follow for the investor to benefit from the various tax reliefs on offer with the schemes. This means that the company must follow the EIS / SEIS rules for at least 3 years after the investment is made. If not, tax relief can be withdrawn from investors.
For its investors to be able to claim and keep the tax reliefs relating to their shares, the company which issues the EIS / SEIS shares has to meet a number of requirements. If the company ceases to meet one or more of those conditions, investors may have their tax relief withdrawn.
One of the most important and often overlooked requirements is that in order to qualify for EIS / SEIS the company raising the finance must continue trading for at least 3 years from the time the EIS / SEIS shares were issued.
This is a reasonable condition as it encourages the longer-term growth of new companies. If the company goes into liquidation or closes down due to commercial reasons, HMRC will usually not seek to claim back tax incentives from investors.
However, HMRC is clear that tax relief can be withheld, or withdrawn from investors if the company doesn’t follow the 3-year rule. For example, a start-up exit such as a third-party sale within the 3-year period.
At Key Business Consultants, we have an expert team of accountants and SEIS specialists who can help. Get in touch with us today to discuss any of the issues raised within this article or call us directly on 02037 282 848.