Very few of the measures announced as part of the mini-Budget in September 2022 have since survived and made into the statute books. However, one of the announcements that has is the expansion to the seed enterprise investment scheme (SEIS).
SEIS has been available for investments into qualifying companies since April 2012. It is designed to help small, early-stage, private companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies. The changes to SEIS are due to take effect from April 2023 and are aimed at encouraging investment by making it available to more companies as well as increasing the annual limits for investors.
The main changes to SEIS from April 2023 are as follows:
- Companies can raise SEIS capital in their first three years of trade instead of the current two years;
- At the time of investment a company’s gross assets can be up to £300,000 instead of the existing £200,000 limit;
- The maximum SEIS funds which a company can raise over the three-year period will increase from £150,000 to £250,000;
- The maximum SEIS investment that an individual investor can make in a tax year will increase to £200,00 from £100,000.
As a reminder, SEIS offers the following main reliefs to individuals investing in qualifying companies:
Income tax relief
Income Tax relief is available at 50 per cent of the cost of the shares, on a maximum annual investment of £100,000 (rising to £200,000 per tax year from April 2023). Relief is given by way of a reduction against an individual’s tax liability, providing there is sufficient liability against which to set it.
Shares must be held for a period of three years from the date of issue for relief to be retained and if they are disposed of within that three year period, or if any of the qualifying conditions cease to be met during that period, relief will be withdrawn or reduced.
There is be a ‘carry-back’ facility which allows all or part of the cost of shares acquired in one tax year to be treated as though the shares had been acquired in the preceding tax year.
Capital gains tax reinvestment relief
If an individual disposes of an asset, crystallising a capital gain, and reinvests all or part of the amount of the gain in shares which qualify for SEIS income tax relief, then 50% of the amount invested can be set against that gain. The amount that can be deducted is the lower of 50% of the gains, or 50% of the SEIS investment. The ‘gain’ reinvested will be exempt from capital gains tax. The investment limit which applies for income tax relief also applies for re-investment relief and therefore will increase from £100,000 to £200,000 from April 2023.
The asset does not have to be disposed of first; the investment in SEIS shares can take place before disposal of the asset, providing that both disposal and investment take place in the same tax year. A gain arising in the preceding tax year can also qualify for relief if the shares are being treated as acquired in the previous tax year under the ‘carry-back’ facility.
Capital gains tax disposal relief
If Income Tax relief has been received (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for at least three years, any gain will be free from Capital Gains Tax. If no claim to Income Tax relief is made however then any subsequent disposal of the shares will not qualify for exemption from Capital Gains Tax.
With a maximum tax relief available of up to 78% SEIS will be a generous incentive for investors in small companies but, as you would expect, there are a number of conditions to be satisfied by the investor and the company and the trade it will be carrying on. The above is just an overview of the reliefs available and professional advice should be sought before contemplating an investment.
In addition investment in a SEIS must also be considered from a commercial point of view as it is aimed at new companies which need investment to grow. Individuals do therefore need to identify and be happy with the risks associated with this.
If you would like more information on SEIS and the forthcoming changes please speak to our Tax Director, Jenny Marks.
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