The Government has recently introduced the new Seed Enterprise Investment Scheme for shares issued after 5 April 2012 to encourage investment in small start up companies. This scheme will be attractive to investors by offering generous tax reliefs for qualifying investments.
The tax breaks available under the scheme are as follows:
- up-front income tax relief of 50% for subscriptions of shares by investors (with carry back facility to the previous tax year)
- no capital gains tax on the disposal of scheme shares which are held for more than three years
- one-off exemption from capital gains tax on disposals of other assets in the tax year ended 5 April 2013 where the gains are reinvested through the scheme in the same tax year.
In order to be eligible for the scheme, the investment, the company and the investors need to meet certain conditions and, as with the Enterprise Investment Scheme, there are numerous anti-avoidance rules.
Care should therefore be taken by investors before making investments which they would wish qualify under the scheme. Some of the main company conditions are as follows:
- the company's qualifying trade must not be more than two years old
- the same exclusions from 'qualifying trade' as for the Enterprise Investment Scheme, e.g. leasing, property development, etc
- the company must not be under the control of another company
- the company must have a permanent establishment in the UK
- the company must have fewer than 25 employees
- the company must have gross assets of less than £200,000 at the time of the investment
- the company will be able to raise a total of up to £150,000 under the scheme (total and not an annual limit)
- once 70% of Seed Enterprise Investment Scheme funds have been utilised, the company may raise further funds under the Enterprise Investment Scheme or from Venture Capital Trusts.
Some of the main investor conditions are as follows:
- annual investment limit of £100,000
- directors can qualify but employees Cannot
- no substantial interests in the company (broadly interests greater than 30%).
The Seed Enterprise Investment Scheme is a welcome development which enhances the tax reliefs available for equity investments in smaller companies. The only downside from the perspective of the company seeking investment is that the amount that a company can raise under the scheme is limited to £150,000. A larger limit would have made a more meaningful difference to the funding options for small companies.
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