The Budget 2013 contained a number of measures to extend the capital gains tax relief for re-investing gains in Seed Enterprise Investment Scheme (SEIS) shares.
Amidst the inevitable analysis of the winners and losers in the wake of George Osborne's fourth budget, one group to emerge with an undoubted victory, albeit a qualified one, are business angels and the start-up companies in which they invest.
SEIS was introduced in 2012 as the junior companion to the Enterprise Investment Scheme, which offers tax reliefs to those investing in small companies in the light of the risks associated with doing so. SEIS provides even more attractive reliefs in respect of investments in even more early-stage companies, which often struggle to attract investment because of the heightened risks attached.
The original scheme allows investors subscribing for new ordinary shares in qualifying companies, broadly unquoted companies with gross assets of £200,000 or less and fewer than 25 full-time employees which carry out a qualifying trade, to claim both income tax and capital gains tax relief.
The income tax relief is against 50% of the sum invested in the start-up company up to an annual investment limit of £100,000, provided the shares are held for three years. An SEIS investor qualifying for such relief can also claim an exemption from capital gains tax on any gain arising on the disposal of the shares.
The scheme also allowed for gains arising on the disposal of any asset in 2012-13 to be exempt from capital gains tax to the extent that an amount equivalent to such gain was reinvested in a qualifying company in the same year, again up to a maximum limit of £100,000.
The measures to be introduced in Finance Bill 2013 will extend the latter capital gains tax exemption to gains made in 2013-14, provided the sum is reinvested in SEIS shares during 2013-14 or 2014-15. However, the relief will be limited to only 50% of the amount re-invested, rather than 100% as under the original rules.
The government has also moved to remove an unintended feature of the original rules, which prevented certain companies from being eligible only because they had been established by a company formation agent. The 'independence' condition will be amended in Finance Bill 2013 to cover off this inadvertent gap in the legislation.
This extension of the SEIS scheme will undoubtedly be seen as a step in the right direction towards encouraging activity in the start-up business sector. However, the reduction in the relief by 50% may leave some feeling that the measures could have gone further. Moreover, the extension of SEIS reinvestment relief could be viewed as a tacit acknowledgment that take-up of the scheme has not been as extensive as hoped.
The reaction of investors over the next two years will determine whether the seed investment scheme will grow further, or whether alternative routes will have to be sought to boost our smallest businesses.