“While the earth remaineth, seedtime and harvest, and cold and heat, and summer and winter, and day and night shall not cease”. But the same cannot be said of Seed EIS tax relief, which will lose part of its attraction on 6 April next (assuming of course that the earth remaineth after 21st December and that the New Age Mayan apologists are wrong).
So what is this “Seed EIS relief” anyway? Well, think of it as EIS on speed: whereas EIS gives tax relief of up to 30%, Seed EIS can give tax relief of up to 78%. Specifically the attractions include up-front income tax relief of 50% for subscriptions of shares by investors (who may include directors) of up to £100,000 per tax year and exemption from CGT on the disposal of SEIS shares held for more than three years. But the icing on the cake is that in addition to this, gains are exempt from tax if they are reinvested into SEIS qualifying shares – but only for gains made in 2012/13.
There are some hurdles to jump through of course, and the qualifying conditions are tighter than for regular EIS. SEIS is targeted expressly at new business start-ups: the company must carry on a new business and not one that has been carried on by that company or any other person in the two years prior to the SEIS share issue. This applies even where a trade was acquired from persons with no connection whatsoever with the company.
As with EIS the new SEIS companies business must be a qualifying trade so excluding a number of activities such as property development, leasing, farming and market gardening. Other conditions include:
- The company must have fewer than 25 full-time employees (instead of 250 for regular EIS)
- At the time of the SEIS investment, the company’s gross assets must not exceed £200,000 (in place of £15m);
- Qualifying companies may raise up to £150,000 under the scheme (in place of £5m) and the funds raised must be used within three years.
Finally, we mention a very odd pitfall of SEIS whose logic escapes us but which HMRC have confirmed they will enforce. A seed EIS company must satisfy a stringent ‘independence requirement’ – from the very moment it is incorporated it must not be under the control of another company. Contrast this with the “full-fat” EIS regime where the prohibition on control by another company applies only from the time the EIS shares are issued. So, bizarrely, a company will fail for Seed EIS purposes where the formation agents use a nominee company to hold the founder share despite every intention to transfer the share to an individual. Why? Answers on a postcard please…
For more on Seed or Regular EIS, please get in touch with your usual BKL contact or use our enquiry form.