The Seed Enterprise Investment Scheme

From 6 April this year the UK government’s new Seed Enterprise Investment Scheme (SEIS) will be legally effective.  The SEIS regime offers one of the most significant and attractive tax relief schemes in the UK code and is designed to incentivise the flow of capital to promising early stage companies.

As a digital riptide continues to disrupt traditional business models at an ever greater rate, for savvy investors these SEIS tax breaks offer an incredible opportunity to back next generation web-based businesses which can quickly develop a global brand based on clever use of ever cheaper internet technologies.

Scheme highlights
An individual making a SEIS investment will benefit from income tax relief of 50% of the amount invested (up to a maximum of £100,000 per tax year) regardless of the rate at which the individual is taxed, exemption from capital gains tax on any proceeds of sale of the SEIS investment and also  exemption from capital gains tax on the proceeds of sale of other capital assets during the tax year 2012/2013 if and to the extent those gains are reinvested in a SEIS qualifying company.  These factors go some way to significantly de-risking the investment.

Notably, a company that first raises fund through SEIS will still be able to go on and take advantage of investment raised under the Enterprise Investment Scheme (EIS) or from a Venture Capital Trust (VCT), albeit not until the company has spent at least 75% of the SEIS monies raised.

Limitations
The key limitations of an SEIS investment are that there is a limit of £150,000 that a company can raise, it can’t have already raised funding via the EIS or VCT regimes and the SEIS funds must be used in a qualifying business activity within three years of the investment.

Also, the shares must be issued within two years of incorporation of the company for SEIS relief to apply, the company must have a UK permanent establishment, the investor can’t be an employee of the company (although they can be a director), the company must have fewer than 25 full time employees and the investor can’t hold more than 30% of the company’s ordinary share capital.

Non UK residents
For individuals who are non UK residents (or who don’t qualify for SEIS), a trust agreement can be put in place whereby an eligible UK resident can invest and hold the legal title to the SEIS shares on behalf of the foreign investor who has a beneficial interest and thereby receives all the benefits of his investment and the SEIS tax reliefs.

About the author
Jonathan is an experienced transactional lawyer, with a keen focus on digital media, who is skilled at structuring and negotiating small equity investment deals in startup companies.

Jonathan writes a popular blog on social media, business and legal issues and is happy to connect on LinkedIn and Twitter.  Jonathan is employed by Bargate Murray, an award winning streamlined and agile international law firm, located near London’s burgeoning Tech City.  Bargate Murray’s team know both the area’s main deal makers and also a number of high growth technology start-ups open to investment.

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