Introduction to the Seed Enterprise Investment Scheme

Robert Young

9 February 2012

“We are proposing a new, targeted scheme to encourage greater investment by business angels in start-ups and

entrepreneurs’ businesses. This, alongside our reform of the EIS and VCTs, is part of our plan to increase the

competitiveness of the UK tax system, demonstrating that Britain is open for business.”

David GaukeExchequer Secretary to the Treasury

Background

> SEIS to be introduced as a new part of the UK fiscal legislation targeted at supporting start-ups and SMEs

> Complements existing enterprise investment scheme (EIS) and venture capital trust (VCT) tax regimes

> SEIS will apply to investments made by individuals into qualifying start-up companies from 6 April 2012 onwards

What is the SEIS?

Summary> SEIS offers income tax and capital gains tax (CGT) reliefs for investors

in shares in “seed stage” companies

> Income tax relief operates as a reduction in the investor’s normal income tax liability

> CGT relief operates by exempting the proceeds of sale of an SEIS investment from tax

> Capital gains from sales of assets during tax year 2012/2013 reinvested under SEIS in same year will be exempt from CGT

> Investments can be direct into companies or via suitable collective schemes (e.g. “SEIS funds”)

Conditions for Relief

Conditions for Investor> Investor must subscribe cash for ordinary shares (i.e. not loan stock of any kind)

in qualifying company

> Shares cannot be given any priority entitlements or protections (save for limited non-cumulative preferential dividend rights)

> Investor must not (directly or indirectly) hold more than 30% of the company's ordinary share capital, issued share capital or voting rights (NB - no restrictions on loan capital)

> Existing or new directors in the company are eligible, but not employees

> Shares must be held by the investor for three years

> Tax relief subject to claw-back if certain conditions are not met (e.g. three year hold period and “30% test”)

Conditions for Company> Must exist wholly for the purpose of carrying out one or

more new qualifying trades (no “demerging” or “phoenixing”)

> Gross assets must not exceed £200,000 immediately before the investment

> Must have fewer than 25 full time employees

> Must have a UK place of business

> Shares must not be listed (NB – AIM is OK)

> Shares must be issued within two years of incorporation of company

Conditions for Company (continued)> The company must not control or be controlled by another company or be a

member of a partnership (more restrictive than the equivalent EIS provisions)

> The company must not have raised any investment under the EIS/ VCT schemes previously (NB – can raise EIS/VCT money after, once it has spent at least 75% of the SEIS funds)

> Capital raised under the scheme must be used by the company in a qualifying activity within three years

> Tax relief cannot be claimed until company has spent 70% of SEIS money in its qualifying activity

> Maximum of £150,000 can be raised under SEIS

What are the benefits of SEIS?

Benefits of SEIS Relief – Income Tax

> Individual income tax relief of 50% of the amount invested, up to £100,000 per tax year

> Equates to maximum income tax saving of £50,000

> Does not depend on personal tax rate (i.e. do not have to be a top rate taxpayer to benefit from 50% relief)

> Tax relief can be split between tax year of investment and previous tax year (NB – cannot carry-back relief to 2011/12 tax year, as that pre-dates the scheme)

Income Tax – Practical Example

> Investor has income tax liability of £25,000 for tax year 2012/2013 and £28,000 for tax year 2013/2014

> Invests £80,000 in new SEIS fund in May 2013

> SEIS fund invests money in various companies during 2013 – companies each spend funds and issue SEIS compliance certificates to investor

> Investor entitled to £40,000 SEIS tax relief:- Claims £28,000 to clear income tax liability for 2013/2014- Claims £12,000 against income tax liability for 2012/2013

> Net income tax liability for two tax years of £13,000

Benefits of SEIS Relief –CGT

> Exemption from CGT on any proceeds of sale of an SEIS investment (subject to minimum holding period of three years)

> If investment realises a loss, generally possible to off-set the loss against taxable capital gains for the same (or any later) tax year or taxable income for the same or the previous tax year

> Any such loss is adjusted to deduct income tax relief claimed

Benefits of SEIS Relief – CGT Special Exemption

> Special “one off” relief for capital gains realised in tax year 2012/13 and reinvested under SEIS in the same year

> Investor must dispose of an asset in 2012/13 at a capital gain (no restriction on the type of asset)

> A qualifying investment under SEIS during 2012/13 may be set against the capital gain, up to a maximum of £100,000

> Gain is exempted from tax (subject to claw-back if SEIS relief is subsequently removed – e.g. because of a disposal within three years)

Income Tax & CGT - Combined Example

> Investor has total income tax liability of £40,000 for tax year 2012/2013

> Investor sells an investment property for £400,000 in June 2012 at a gain of £100,000 (notional CGT liability of £28,000 @ 28%)

> Investor reinvests £80,000 of proceeds in a SEIS fund in August 2012

> Investor claims £40,000 SEIS income tax relief (clears income tax bill)

> Investor claims set-off of £80,000 against £100,000 gain – leaves £20,000, taxable at 28% (i.e. £5,600 tax)

> Effective tax rate of c.3% on taxable returns for year

Summing Up

> SEIS income tax and CGT reliefs are some of the most valuable in the tax code

> Single year CGT exemption is potent in encouraging reinvestment of capital in seed companies

> Prospect of SEIS funds to pool capital for diversification of risk is particularly appealing

> Happy to discuss further!

Office details

Shanghai Unit 1509, United PlazaNo. 1468, Nanjing West RoadShanghai 200040T. +86 21 6247 7247F. +86 21 6247 6248

WarsawBSJP LegalAl Armii Ludowej 26 PL-00-609 WarsawT. +48 (0) 22 579 89 00F. +48 (0) 22 579 89 01

BerlinEbertstraß5 15 10117 BerlinT. +49 (0)30 88 56 36 0F. +49 (0)30 88 56 36 100

BrusselsTrône House4 Rue du Trône1000 BrusselsT. +32 (0)2 289 6060F. +32 (0)2 289 6070

Cambridge24 Hills RoadCambridge, CB2 1JPT. +44 (0)1223 446400F. +44 (0)1223 446401

Dubai26th Floor, Rolex Tower, Sheikh Zayed Road, P.O. Box 33675Dubai, United Arab EmiratesT. +971 (0)4 309 1000F. +971 (0)4 358 7732

DüsseldorfBenrather Straße 1540213 DüsseldorfT. +49 (0)211 83 87 0F. +49 (0)211 83 87 100

Frankfurt Senckenberganlage 20-2260325 Frankfurt a.M.T. +49 (0)69 971 30 0F. +49 (0)69 971 30 100

HamburgHanseatic Trade Center Am Sandtorkai 4120457 HamburgT. +49 (0)4 0 36 80 30F. +49 (0)4 0 36 80 3280

London5 New Street SquareLondon EC4A 3TWT. +44 (0)20 7300 7000F. +44 (0)20 7300 7100

MunichIsartorplatz 8, 80331 MunichT. +49 (0)89 2 10 38 0F. +49 (0)89 2 10 38 300

Paris42 avenue Montaigne75008 ParisT. +33 (0)1 72 74 03 33F. +33 (0)1 72 74 03 34

© Taylor Wessing 2012This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice.Taylor Wessing’s international offices operate as one firm but are established as distinct legal entities.For further information about our offices and the regulatory regimes that apply to them, please refer to www.taylorwessing.com/regulatory

Associated officesRepresentative offices

SingaporeRHT LawSix Battery Road #09-01, #10-01 Singapore 049909T + 65 6381 6868F + 65 6381 6869

BeijingUnit 1503, Tower 2, Prosper CentreNo. 5, Guanghua RoadChaoyang DistrictBeijing 100020T. +86 10 8587 5886F. +86 10 8587 5885