Prepared by Gary Green ACA 23 April 2013
Seed Enterprise Investment Scheme (SEIS) Carry-Back Relief This article will set out the potential opportunities available in regard to carry-back relief under Seed Enterprise Investment Scheme (SEIS) legislation. The SEIS is Chancellor George Osborne’s brainchild to get small businesses and entrepreneurs the funding they need and consequently, boost the economy. Investors can obtain generous income tax and capital gains tax (CGT) breaks for their investment. On 29 November 2011, the Chancellor, George Osborne, announced the arrival of a junior version of EIS to be known as Seed Enterprise Investment Scheme which arrived on 6 April 2012. The key features of the reliefs are:
a qualifying investor will be able to invest up to £100,000 into qualifying companies in a tax year receive income tax relief of 50% on the sum invested unused relief in one tax year can be carried back to the preceding tax year if there is unused relief available for that year
Example 1 Susan is a lawyer paying taxes at the top rate and invests £130,000 via SEIS during 2012/13 Susan invests £50,000 via SEIS during 2013/14 As Susan has not used £50,000 of the £100,000 limit in 2013/14, she can carry back the surplus to the previous year. Therefore, she may obtain full income tax relief for both years. This means she will get a tax account deduction of up to £90,000 over the two years, being 50% x (£130,000 + £50,000)
the maximum amount that each company can attract in investment qualifying for SEIS is £150,000 in total the company must not have net assets of more than £200,000 before any SEIS investment for 2012/13 only an individual who makes a capital gain on another asset and uses the amount of the gain in making a SEIS investment will not pay tax on that gain subject to certain conditions However, a gain in 2013/14 can also be carried back to 2012/13
Example 2 Tim is a banker and decides to cash in his deferred bonus shares and sells them for £180,000 in May 2012, making a profit (or gain) of £80,000. Providing Tim makes qualifying investments of at least £80,000 in SEIS shares in the remainder of 2012/13 and all other conditions are met, the £80,000 gain will be completely free of CGT. Note that Tim does not need to invest the proceeds of £180,000 only the gain. Tim could also decide to keep the shares and sell them before 5 April 2014 in order to achieve a gain closer to £100,000 and maximise the CGT exemption through SEIS relief by claiming carry back relief. CGT partial exemption may still be available even if the gain is not invested in full, as per the example below Example 3 Tim sells his shares for £180,000 in May 2012, making a profit of £80,000. Tim makes qualifying investments of £40,000 in SEIS shares in the remainder of 2012/13 and all other conditions are met. Therefore, his exemption is restricted to £40,000 so £40,000 of his gain remains subject to CGT.
anti-avoidance legislation is also in place to prevent exploitation for tax avoidance purposes.
The qualifying investor The investor or someone who is associated with them must not be an employee of the company in which the investment is being made. They can however be a director, but must not have more than a 30% interest directly or indirectly by other means any of the following:
ordinary shares assets on winding up issued shares voting rights
The shareholder cannot receive any ‘value’ from the company during the three-year qualifying period. However, this does not include ‘ordinary commercial payments’ such as dividends or reimbursements of expenses, if the investor is a director.
The qualifying shares The shares must be ordinary shares which have been subscribed for wholly in cash and are fully paid up. They must be held for a three year period from the date of issue. The SEIS money raised must be
spent within three years of the date of issue of the shares. The anti-avoidance requirement is that there must be no pre-arranged exit for the investor involving the sale of the shares.
The qualifying companies The basic requirements are that the company must be unquoted and must not have been incorporated for more than two years before the qualifying shares are issued. The company must exist wholly for the purpose of carrying out one or more qualifying trades throughout the three year period from the date of issue of the shares. The other main conditions relating to the company can be summarised as follows:
the company must be UK-resident immediately before the investment the gross assets of the company must not exceed £200,000 the company must neither control another company nor be controlled by another company throughout the three years there are less than 25 full-time employees in the company and any related entity the total amount of investment made under SEIS in the company must not exceed an aggregate of £150,000. This is a cumulative limit, not an annual limit. the company must not have had EIS or Venture Capital Trust (VCT) investment before the SEIS shares are issued the company can seek EIS or VCT investment after it has received SEIS investment but must show that it has spent at least 75% of the money received under SEIS and the company must not be a member of a partnership
The qualifying trades The company must carry on a genuine new trade business consultant. This means that there may be issues if the same activities had been carried on as part of another associated trade. However, any trading activity will qualify unless it is an excluded activity such as property development, retail distribution, hotels, nursing homes and farming will not qualify. The trade must be carried out on a commercial basis.
The relief process The relief is given as a reduction against the total income tax liability for the year but cannot turn a tax liability into a tax repayment. In that situation the individual would be able to carry back the unused relief to the preceding tax year for use if there was any tax unrelieved for that year. It is the company that issues the certificates to the shareholders which are then, in turn, used to claim the relief through and income tax return submission. The relief can be withdrawn if any of the criteria above are departed from, which is why it is important to have continual consultation for the three year period.
Example 4
Stephen is a solicitor and invests £80,000 under SEIS in 2012/13. Potentially his tax relief is 50% of the investment which is £40,000. His tax liability for the year is £65,000 and therefore his tax liability will be reduced to £25,000. Jonathan is an entrepreneur and is planning to invest £80,000 under SEIS in 2013/14. His tax liability in 2012/13 is £30,000 and his forecast tax liability in 2013-14 is £50,000. Jonathan can make a claim to carry back the unused relief of £30,000 to the preceding tax year 2012/13.
Capital Gains Tax Qualifying shares, when sold, are free of CGT. If shares need to be sold before the three year period has finished then Entrepreneurs’ Relief (ER) is potentially available to reduce CGT at 28% to 10%. So there are possibilities to partially back out of the arrangement if unforeseen events occur. Capital losses are also possible under SEIS, but this is restricted to the amount invested less the tax relief obtained.
Example 5 Kasra is a film and TV producer who invested £75,000 in SEIS shares in 2013/14 and received £37,500 income tax relief. If the SEIS company, for one reason or another, ends up not returning any value to the shareholders then Kasra can claim a capital loss of £37,500 which would attract income tax relief at his prevailing rate in the year he is able to offset this loss. A carry back of this loss would be possible to 2012/13 in order to get immediate relief.
Carry Back on Capital Gains Tax Originally CGT relief on SEIS investments would not be available for gains in the tax years after 2012/13. However, HMRC have subsequently changed their mind in a positive way and allowed a carry back of 2013/14 CGT to the previous 2012/13 tax year.
Example 6 David is a dentist and sold his rental investment property 2012/13 resulting in a gain of £40,000. He invested £40,000 in SEIS in 2012/13 and as a result he receives CGT exemption and pays no tax on the gain. If David sold the property after 6th April 2013 (i.e. in 2013/14) he is now able to claim the gain in 2012/13 and get CGT exemption on this gain.
This gives a lot of potential for SEIS investors to carry back 2013/14 CGT gains on shares or second properties to maximise this one off situation. If you have assets with unrealised gains you should get in touch with us to see how you can benefit.
Example 7 Rolfe is a hedge fund manager with annual income tax bills in excess of £100,000 each year. He disposes of deferred performance related shares resulting in a gain after allowances and reliefs of £150,000. Rolfe invests £200,000 in SEIS shares in 2013/14, carrying back £100,000 to 2012/13. He also carries back £100,000 of the gain on the sold shares to 2012/13 and sets this off against the SEIS £100,000 investment. He therefore would only pay CGT on £50,000 gain and also potentially claim ER as well to reduce the rate of tax from 28% to 10%. This would save Rolfe a maximum potential of 28% CGT on the sold shares of £28,000 and £50,000 income tax on SEIS shares, a total of £78,000 in 2012/13. He will also receive £50,000 income tax relief in 2013/14. The CGT and income tax reliefs are able to be carried back to the prior year in this one off circumstance.
If potential SEIS investors intend on settling any property into Trusts at some point in the future then there could be tax planning opportunities to exempt CGT if planned correctly in 2013/14. There are also opportunities for business owners to expand down their industry’s supply chain horizontally or vertically and obtain SEIS relief on the set up costs.
This article is intended to inform rather than advise and is based on legislation and practice at the time. Circumstances change and do not apply uniformly in all situations. We accept no responsibility for any financial loss incurred as a result of you reading this article whether by action or inaction.
SEIS Company Ideas: Childcare/babycare IT support and repairs Web design et al Cleaning Co Guitar manufacturing company requires financing –newco, sales already £10k+/month and needs more financing to capitalise, may become £1-2m turnover in 2-3 years Product design – can bring a client’s proposals for consideration Repairs and maintenance – already running 1