SEIS and EIS tax benefits are huge, but make sure you don’t trip up!
A potential client called this week in a state of great excitement. He had just heard about the under trumpeted SEIS (Seed Enterprise Investment Scheme) and thought he had found a great way to essentially double his £60,000 investment in a start-up Company due to the 50% SEIS income tax relief on the cost of shares.
We started to work through the requirements: Is the Company unquoted? Yes, check. Does the Company have fewer than 25 employees? Yes, check. Does the Company have less than £200,000 in gross assets? Yes, check. Has the Company any investment from a venture capital trust? No, check. Is the trade of the Company less than two years old? Yes, check. Is the Company a UK resident? Yes, check. Does the trade fall within the list of excluded activities? No, check. Will the Company receive less than £150,000 in total under SEIS? Yes, check….
By this point it is all starting to look very hopeful and the investor is itching to complete the SEIS Advance Assurance Form to be submitted to HMRC. To jump the next hurdle we discuss in detail the slightly complicated substantial interest rules (a SEIS investor must hold less than 30%, taking into account the shareholdings of “Associates”, who include business partners and relatives, but not siblings).
Essentially, although the SEIS rules seem complicated, they are looking to only apply the SEIS relief to a genuine outside investor looking to finance a smaller higher-risk trading company. This investor is a genuine outside investor and there is no reciprocal arrangement in place where two different shareholders agree to invest in each other’s companies to obtain tax relief.
Then the bombshell hits: The investor has already made a loan of £60,000 to the Company which he was expecting to be repaid in the next twelve months. All thoughts of SEIS scurry away. Tax relief will be withdrawn or reduced if at any time during the three years from the date of issue of the shares the investor or an associate receives “value” from the Company. (This also applies for EIS investments).
How much tax relief is withdrawn will depend on the amount of the value received. Repayment of a debt will reduce the tax relief by the amount the repayment. For example, if an investor injects £50,000 SEIS investment into a company in 2014, then receives repayment on a prior loan of £20,000 in 2015, the amount of SEIS investment eligible for SEIS tax relief will be reduced to £30,000.There were insufficient funds in the Company to repay the investor prior to the issue of the SEIS shares, and the investor did not wish to invest further funds into the Company. The issue of shares in consideration for the liquidation of a loan, or by the ‘conversion’ of loan stock would not raise money for the Company and therefore the shares would not be issued for the purpose of a qualifying business activity (so SEIS relief would not apply). For convertible loan agreements there are another host of matters to consider,
If the Investor had known about the SEIS scheme in advance, he could have injected the £60,000 into the Company for equity rather than as a loan. For his next investment he will be better prepared.
Take Away: The earlier in the process investors are aware of EIS or SEIS relief, the more likely it is that they will be able to benefit from these generous tax reliefs. For a genuine third party investment, early consideration of SEIS may save the Investor over 50%. EIS investment tax relief is also available for larger, longer established companies with income tax relief at 30%.
Helen Curtis is a senior associate solicitor in the London corporate commercial team, advising on equity structures and taxation implications for a wide variety of investors and companies seeking SEIS and EIS investment.