What is Seed Capital?

We continue to see more clients looking to invest in new start-up businesses. Typically seed capital is provided to new start-up businesses by family and friends of the entrepreneur and also business angels who are usually unconnected wealthy individuals.

Large private equity firms generally prefer not to take the risk of investing in start-up businesses and prefer to invest in established businesses looking to develop and grow. Banks can also be reluctant to provide funding to businesses with no or limited operating history and with no assets on which to provide security.

Startup Investment Solicitors

Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) was set up under the Enterprise Investment Scheme (EIS) in 2012 to specifically address the difficulties that start-up businesses face in obtaining finance by making available a number of tax reliefs to individual investors to encourage seed investment.

SEIS is aimed at encouraging seed finance of up to £150,000 for very small unquoted companies with fewer than 25 full-time employees and gross assets of no more than £200,000.

SEIS Tax Relief

As the risk associated with investing in small start-up companies is very high, the tax reliefs available to investors under SEIS are also high and include the following:

  • Income tax relief up to 50%, up to an annual limit of £100,000 (this will increase to £200,000 in April this year);
  • No Capital Gains Tax (CGT) on the disposal of shares held for 3 years that qualified for SEIS tax relief;
  • CGT exemption of 50% of gains re-invested in shares qualifying for SEIS income tax relief up to a maximum exemption of £50,000.

Share loss relief to enable an investor to claim relief against income tax on a disposal of shares if the company is unsuccessful. Business property relief may also be available. These tax reliefs are only available to investors with a UK tax liability and investors should consult with their tax advisers as to the availability of these reliefs.

In order for an investor to receive SEIS relief, the start-up company must follow the SEIS rules for at least 3 years after the investment is made otherwise the tax reliefs will be withdrawn or reduced.

The SEIS rules are very specific and include requiring the company to be carrying out a “qualifying trade”, be established in the UK and not trading or seeking to trade its shares on a recognised stock exchange. Investors will only qualify for the various tax reliefs under SEIS if the company meets all the requirements. The requirements under SEIS are based closely on EIS rules, as many companies will want to go on to use EIS after initial investments have been made under SEIS.

What Kind of Shares Can Investors Hold?

The shares that are issued under the SEIS scheme must be full risk ordinary shares which are not redeemable and which carry no special rights to the company’s assets. The shares can have limited preferential rights to dividends but the right to receive dividends cannot be allowed to accumulate nor can the dividend be varied.

When the shares are issued, there cannot be an arrangement to:

  • guarantee the investment or protect the investor from risk;
  • sell the shares at the end of, or during the investment period, that is a pre-arranged exit;
  • structure your activities to let an investor benefit in a way that is not intended by the scheme;
  • create a reciprocal agreement where you invest back into an investor’s company to also gain tax relief; or
  • raise money for the purpose of tax avoidance – the investment must be for a genuine commercial reason.

Strict Compliance

The SEIS is tax driven so it is imperative that the company complies with all the SEIS rules to ensure that the tax reliefs are not withheld or reduced. Entrepreneurs and investors will therefore need to obtain detailed tax and legal advice at an early stage. We can work with you and your tax advisers to ensure that the legal documentation reflects the deal struck by the parties and also complies with the SEIS rules.

Servicing clients in Ascot, Bracknell, Camberley, Weybridge, Guildford and the surrounding areas.

Please contact us for more information on the documentation for seed investing.