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Sowing The Seeds Of Enterprise - Taking A Look At A New UK Investment Structure

Mark Payton, Mercia Asset Management, Managing Director , 3 October 2012

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This article addresses the subject of “Seed Enterprise Investment Schemes,” a variant of long-standing EIS structures. The SEIS vehicle was introduced by the UK government this year.

Editor’s note: The following article is by Mark Payton, managing director and co-founder of UK-based Mercia Fund Management, about “Seed Enterprise Investment Schemes,” a variant of long-standing EIS structures. The SEIS vehicle was introduced by the UK government this year and is an example of how governments are – or say they are – seeking to boost venture capital and finance for small and growing businesses. (To view more on wealth management and venture capital, click here.) Payton talks about the pros and possible cons of these structures. His views are his own and not necessarily endorsed by this publication.

In July 2012, the government confirmed the introduction of Seed EIS (SEIS) which will remain as a government-approved scheme for a further three years. The new scheme makes investing in early stage businesses highly attractive. Indeed, SEIS is an opportunity to evaluate start-up opportunities for investors who are new to this sector.

But promotion of SEIS by the government has been limited, indeed virtually non-existent. This seems wasteful, especially as in this tax year only (2012/2013), there are extra reliefs available: a high-rate income tax payer with a substantial capital gains tax liability investing in a SEIS and taking the loss reliefs available stands to recover most if not all of their original investment back in tax reliefs in the event that an investment fails.

The features of the SEIS scheme help to reduce the risk of investment. A SEIS is fixed to investment in businesses that have been actively trading for less than two years, have fewer than 25 employees and gross assets below £200,000 ($322,848). For investors, the additional risk of investing in young businesses is balanced by 50 per cent income tax relief, inheritance tax relief, loss relief, capital gains tax (CGT)-free returns. Private investors can invest in a range of start-up businesses with sums of as little as £10 while claiming up to 78 per cent tax relief.

This is hugely generous, but it is currently only for this year; in subsequent years the CGT liability loss will become a deferral – as is the case with EIS (Enterprise Investment Scheme).

A company can only take up to £150,000 of SEIS investment in total, but an investor can invest up to £100,000 per year across multiple companies as long as no more than £150,000 goes into one company.

Another feature of SEIS is that these shares won't have many preferential rights. This simplifies the investment and keeps the founders fully motivated.

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