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- The SEIS scheme is designed for early stage businesses and start-ups to raise up to £150,000 in seed capital. The scheme works by offering investors significant tax breaks to invest in new companies. It is the availability of these tax breaks that drive the investment in new start-ups.
- There are generous Income Tax and Capital Gains Tax (CGT) reliefs for investors each of whom can invest a maximum of £100,000 per tax year in qualifying businesses. The investments can be spread across a number of different SEIS opportunities. Note that the investment must be made by an individual rather than a corporate entity or trust.
- Both the investor and the investee must meet certain qualifying requirements after the SEIS share issue to ensure that tax relief is available. For example, investors must hold their SEIS shares for at least 3 years from the date they were issued in order to benefit from certain CGT reliefs. In addition, the start-up company must spend all the monies raised under the SEIS on a qualifying business activity within 3 years.
- Directors of the company raising finance may invest under the SEIS but only if they do not hold more than 30% of the company’s issued share capital or of its voting rights or of the rights to its assets in a winding up. The investor can also not be an employee or have a close relative as an employee.
- One of the important conditions to be met to be able to use the SEIS is to ensure that the qualifying trades conditions are met. A qualifying trade is defined by HMRC as a trade which is conducted on a commercial basis with a view to the realisation of profit. Whilst most business activities qualify there are several important business types that are excluded.
- To qualify to use the SEIS the company must have been active for less than 2 years, with less than 25 employees and have net balance sheet assets of less than £200,000.
- Although it is not strictly an SEIS relief, an SEIS investment will normally qualify for 100% relief from Inheritance Tax after two years where the usual conditions are met.
- The maximum amount of funds that a company can raise through investments qualifying for SEIS is £150,000. The company cannot have received any investment under either the EIS or VCT scheme before using the SEIS to raise investment. Further investment can be raised using the EIS or VCT scheme after the SEIS.
- There are significant administrative hurdles to clear in order to be compliant with all the various SEIS rules. It is important to take proper advice and seek advance assurance from HMRC of qualifying status if you are unsure.
- Under certain circumstances, a foreign company can also benefit from using the SEIS. This can help foreign companies raise money from the UK and also provide UK taxpayers with a wider range of investment options.
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