Extension of SEIS tax relief: how investors and startups can benefit

Seed Enterprise Investment Scheme (SEIS)

The Seed Enterprise Investment Scheme (SEIS) is a scheme that was introduced by the government in 2012/13 following the success of and complementing the Enterprise Investment Scheme (EIS).

In this case, the idea is to help smaller and usually younger businesses raise funds and grow. As with EIS, investing in a SEIS-qualifying company could get you very good tax breaks.

However, because firms of this kind are riskier, there are two important differences:

1. You get a greater income tax break with SEIS than with EIS.
    
2. With SEIS capital gains are not deferred: you can halve the capital gains tax you owe.

How it works

SEIS is a scheme that works by offering tax relief for investors buying new shares in the business. The incentives are as follows:

1. Potential investors can claim 50% of their investment back as income tax relief. For example, if an investor bought shares for £20,000, they would be able to claim back £10,000 from income tax.
    
2. If the investor sells the shares after having owned them for over three years, they will be exempt from capital gains tax.
    
3. If the investor has owned the shares for over 2 years, the shares will not be subject to inheritance tax.
    
4. If an investor makes a loss on their investment, they can offset this against income tax. The relief they can get is equivalent to the income tax they pay. For example, if an investor pays 45% income tax, they can get 45% of the investment loss back. Therefore, if an investment of £10,000 reduces to £5,000, an investor in this tax bracket will be able to claim £2,250 off their income tax.
    
5. Investors can get capital gains reinvestment relief. This means they can claim up to 50% of capital gains tax already paid for other non-SEIS investments if they reinvest this money in a SEIS.

What changes are the government making to the SEIS scheme?

In the September 2022 mini-budget, the UK government announced major improvements to the SEIS programme. 

While most of the mini-budget announcements have subsequently been scrapped, one of the few policies to survive the Autumn Statement 2022 is easing the Seed Enterprise Investment Scheme (SEIS) rules.

1. Companies can now raise £250,000 in SEIS – previously £150,000
    
2. Companies can raise SEIS within the first 3 years of trading – previously 2 years
    
3. Companies must have less than £350,000 in gross assets to be able to raise SEIS – previously £200,000

Transfer of shares

The rules governing the transfer of the share capital of a private limited company are set out in the Companies Act 2006. The Act states that the transfer of shares should take place in accordance with the articles of association of the company whose shares are being transferred.

The articles are a publicly available, legally binding contract between the company and the owners of the share capital in the company ('shareholders') and are automatically legally binding for all shareholders. The articles are a 'rulebook' by which the company is governed and will set out how it should be managed and shares transferred. 

Under the Act, the default articles for private companies limited by shares, called 'model articles', are articles that will apply to a company if it has not chosen its own bespoke articles or has not amended the default articles.

In addition to this, a company may also have a shareholders' agreement in place, which is a private legally binding contract between the shareholders (who all voluntarily choose to enter into it, in comparison to the articles, which are automatically binding on shareholders) and usually the company. 

The agreement may set out the rights and obligations of the shareholders in more detail, often including detailed financial obligations and other restrictions on share transfers (such as 'lock-in' periods discussed above). Unsurprisingly, restrictions on transfers in a private company can be a lot more detailed and far-reaching than the restrictions on transfers in publicly listed companies.

The documents required to transfer shares

1. Shareholders/investor agreement: To protect qualifying SEIS investment, prudent investors and their solicitors will insist on drafting a shareholders' agreement setting out the rights attached to their shareholding in the company.
   
   Although SEIS investors obtaining a minority share in the company will not have an involvement in the day-to-day running of the company, they may wish to retain a veto right over certain constitutional decisions to protect their investment. For example, the ability to block the amendment of the company's business plan without their approval or issuing of further shares.
    
2. SH01: Rather than purchasing shares in the company from its existing shareholders, SEIS investments will commonly involve the allotment of new shares in the company to the investor. This may take place after a sub-division of shares (using form SH02), meaning that the price per paid share by the investor is calculated and registered at Companies House.
    
3. Board minutes and resolutions: To properly record the investment received by the company and shares allotted to the investor, the company should prepare a set of board minutes. The board minutes should be stored in the company's records for 10 years. They should refer to the fact that the company's shareholders have approved a resolution dealing with the entry into by the company of the shareholders' agreement and allotment of shares in the company to the investor.
    
4. Share certificate: The company, having registered the investor as a new shareholder in its register of members, can issue a share certificate to the investor. This sets out how many shares it holds and the type of shares held in the company. The share certificate is evidence that the investor is the legal owner of the transferred shares.

Final steps

Once the transfer has been approved by the directors, registered in the company's register of members, and the investor's name added as holder of the shares, a private company limited by shares will need to file the update of the transfer at Companies House within two months of the transfer being lodged.

The company will also need to update its register of transfers (a register of the transfers of shares of the company) and its register of persons with significant control ('PSC register') or legal entities with significant control ('RLE register').

Any changes to the PSC or RLE registers are legally required to be notified to Companies House. A transferee's unregistered beneficial interest in the shares may cause them to have significant control over the company, and so it may be the case that the PSC register is updated before the register of members reflects the transfer of legal title. The PSC register should be updated 14 days after the changes to the PSC register or RLE register are confirmed.

A private company may also opt to include the information on its PSC register in a central register held at Companies House instead of keeping its own register. A failure to update the registers is an offence by the company and its officers. The company will also need to include the updated list of shareholdings to Companies House as part of its next Confirmation Statement.

What you can get

Investors were previously limited to investing a maximum of £100,000 per year in SEIS and up to £1M in EIS. That's now increased to a personal investor limit of £200,000 per year, which should unlock more investor money (at least from those with more than £100,000 in discretionary funds available for investing).

While the changes won't come into effect until April 2023, companies may be able to take advantage of the changes already. This is because the SEIS rules apply from the date that shares are issued. As a result, companies can consider raising investment now and issuing the shares after 6 April 2023. 

This can be done using a longstop date (i.e. the date that will trigger the allocation of shares to the investor) of six months. By doing this, investors can invest immediately while the shares are only issued after the new SEIS rules take effect. Consider using an advance subscription agreement to raise such an investment.

Contact our corporate solicitors

Our corporate team provides startups, scaleups and investors with specialist SEIS legal advice, ensuring compliance throughout the fundraising and investment process.

We have solicitors in London, Brighton, East Sussex, and Cumbria, and we work with clients across the UK.