Seed EIS Scheme

Investing in the seeds of change – a brief overview of the new Seed EIS scheme

Posted On: Thu 12 Jan 2012 Posted In: News Posted By: Andrew Rainford

The main focus of the recent Autumn statement was on the improved accessibility of funding for small businesses via the credit easing loan program.

Scratch beneath the surface, however, and there is another reason for prospective businesses in North Wales to be optimistic.

The Seed Enterprise Investment Scheme which was outlined in the statement; and confirmed in the draft Finance Bill overview published on 6 December by the Treasury is, potentially, a crucial source of new capital funding for start up or potential start up companies. In an area likeNorth Wales, which is a growing enterprise area, the relief should strike a particular chord.

In essence, the scheme offers private investors extremely generous tax relief in return for a speculative investment in new companies from April 2012. The upfront income tax relief alone is 50% of the amount invested – given as a straight deduction from the investor’s tax bill for the year, regardless of that individual’s overall tax rate.
In addition to this, there will be a 12 month window to exempt Capital Gains Tax on disposals where the proceeds are reinvested into a qualifying start up. This will allow asset rich but cash poor individuals the opportunity of realising investments currently standing at a gain in order to make an investment, without incurring a tax charge With the current highest rate of CGT set at 28%, with careful planning the combined tax relief is potentially worth a staggering 78%. The bottom line on this is that the investor will only be risking 22% of their investment capital, and so the inherent risk of putting money into a start up company is mitigated significantly.

The scheme operates via a subscription for new shares in the new company (in a similar way to the existing Enterprise Investment Scheme). The Treasury’s technical department has confirmed that the capital gains treatment of the SEIS shares will follow the normal EIS rules; namely that any gains will become exempt provided the shares are held for at least 3 years, and any losses incurred will be eligible to offset against other income.

Relief will be restricted to a maximum investment of £100,000 per individual investor per year, and each company can receive £150,000 in cumulative investment under the scheme. As usual for EIS type investments, the investor must not acquire more than 30% of the company.

Further details of the scheme’s workings will be released in due course; however it is clear that this is a window of opportunity for serious capital injections into local businesses. The tax relief speaks for itself; the real key to ensuringNorth Walesbusinesses benefit will be through raising awareness among businesses themselves. If this can be achieved, and the existence of qualifying businesses can be effectively communicated to interested investors, I hope that a new wave of ‘business angels’ can be encouraged to help cement North Wales’ place as a solid base for business within the UK.