Chancellor George Osborne has revamped the rules for Seed Enterprise Investment Schemes in the UK Budget 2013.
SEIS still offer a tax-effective funding solution for start-up businesses but the rules have been tweaked for the 2013-14 tax year.
To meet SEIS funding rules, a company must:
- Be less than 24 months old
- Have no more than 25 employees
- Have assets valued at less than £200,000
- Follow a qualifying trade listed on the HM Revenue & Customs web site
Because start-up businesses face such problems in raising cash to develop their ideas, the Chancellor has lined up a list of tax-busting tax breaks to attract cash from private investors.
SEIS 2013 CGT rules
The original CGT tax breaks expire on April 5, 2013, but to retain momentum in SEIS, Osborne has decided to carry them forward, so:
- Every investor can claim tax relief of 50% on cash pumped in to the business regardless of the rate of tax they pay
- Cash raised from selling assets in the 2013-14 tax year is exempt from capital gains tax (CGT) up to 50% of the amount reinvested in a SEIS eligible company
The change of rules does not affect investments made in the tax year ending April 5, 2013 derived from selling other assets – they still receive CGT relief at 100% as long as they are reinvested in a SEIS.
- If the company fails, investors can set off the loss at the top rate of income tax they pay on any investment that has received income tax relief
The best way to judge how tax effective a SEIS investment works out is by looking at a worked example.
SEIS winners and losers
These figures assume a maximum SEIS investment of £100,000 in the tax year, an investor has two scenarios:
- The company succeeds – Applying the income tax and CGT reliefs, the investor saves £64,000 tax on the £100,000, effectively inputting £36,000 of their own cash. The £64,000 comes from the £50,000 income tax reduction plus £14,000 CGT relief.
If the company is sold for double the investment after three years, the gross return is £200,000 with the gain exempt from CGT.
- The company fails – the investor could set off £50,000 of losses against income tax liabilities, saving a 45% taxpayer £22,500 and giving potential tax relief of £86,500 on an investment of £100,000.
The new rules also clear up an ambiguous hangover from the original legislation.
The amendment updates the ‘independence’ condition of a SEIS company to include companies incorporated by agents. Under the old rules, these companies failed the independence test as they had often been under the control of another company, making the business ineligible for SEIS tax breaks.
