SEIS idea - is this dodgy?
Discussion
My brother has just started a new company selling IT services. It has the potential to be a great business as he has a lot of skills in this area. However, he doesn't have the capital needed at this moment to fund all of the initial setup required with advertising etc.
So talking this through, I had an idea, but I wasn't sure if it was dodgy. So I would welcome a second opinion.
The idea is based on the SEIS scheme which I believe is still in operation and open for new companies. I know that the original end date was April this year but I couldn't see any information confirming that the scheme date had been extended.
So, assuming it is still open, I was thinking of the following;
Lets assume I invested £50,000 in return for a 30% stake in the new business. My brother's company would use these funds to get an office, hire one member of staff and for an initial marketing budget.
I would then get 50% tax relief. I tend to manage my own dividends to be on the threshold of the higher rate tax bracket. However, I was thinking I could increase my dividend in order to incur an additional tax charge of £25,000 with the intention of using the tax relief from the SEIS investment to offset my personal tax on these dividends. Can I do that?
Next I realise I would need to hold the shares in my brother's company for at least 3 years. And if the company doesn't do well realistically I would have to hold them for much longer. However, what happens if my brother 3 years down the line is doing well and wants to buy back the shares before he starts paying dividends.
Can he use his pre-tax profits from his company to buy back my shares? Or would he need to purchase the shares from his own taxed personal income?
If he could use the company's funds to buy back my shares, lets say he buys it for £50,000. In that instance I would in effect have £25,000 more than I would otherwise have had.
Taking this to the next stage, what would happen if I started a new company in a couple of years time, and he then decided he wanted to invest in my new company. Assuming the company was SEIS qualifying, could he invest in my business? It might end up looking like a reciprocal arrangement, giving him similar tax advantages, although of course this wouldn't be the main objective.
I know there are a few finance geniuses on this forum, so would be very interested to hear other people's view if this sounds reasonable or dodgy before I go and and try and get professional advice?
So talking this through, I had an idea, but I wasn't sure if it was dodgy. So I would welcome a second opinion.
The idea is based on the SEIS scheme which I believe is still in operation and open for new companies. I know that the original end date was April this year but I couldn't see any information confirming that the scheme date had been extended.
So, assuming it is still open, I was thinking of the following;
Lets assume I invested £50,000 in return for a 30% stake in the new business. My brother's company would use these funds to get an office, hire one member of staff and for an initial marketing budget.
I would then get 50% tax relief. I tend to manage my own dividends to be on the threshold of the higher rate tax bracket. However, I was thinking I could increase my dividend in order to incur an additional tax charge of £25,000 with the intention of using the tax relief from the SEIS investment to offset my personal tax on these dividends. Can I do that?
Next I realise I would need to hold the shares in my brother's company for at least 3 years. And if the company doesn't do well realistically I would have to hold them for much longer. However, what happens if my brother 3 years down the line is doing well and wants to buy back the shares before he starts paying dividends.
Can he use his pre-tax profits from his company to buy back my shares? Or would he need to purchase the shares from his own taxed personal income?
If he could use the company's funds to buy back my shares, lets say he buys it for £50,000. In that instance I would in effect have £25,000 more than I would otherwise have had.
Taking this to the next stage, what would happen if I started a new company in a couple of years time, and he then decided he wanted to invest in my new company. Assuming the company was SEIS qualifying, could he invest in my business? It might end up looking like a reciprocal arrangement, giving him similar tax advantages, although of course this wouldn't be the main objective.
I know there are a few finance geniuses on this forum, so would be very interested to hear other people's view if this sounds reasonable or dodgy before I go and and try and get professional advice?
Not necessarily dodgy but there is a lot of anti-avoidance around SEIS and its bigger brother, EIS. HMRC enforce the rules rigidly and it is very easy to lose the relief.
You really need professional advice on this.
But - increase your dividends to use the income tax relief? Yes
Buying the shares back - should be possible for the company to buy back the shares (if it has reserves). This would be a dividend but if you receive no more than you paid, then should be no income tax. However, you cannot have any "arrangements" in place to allow you to exit when you make the investment, so care is needed.
Reciprocal investment - HMRC are very alert to this and it is specifically given as an example in their manuals where SEIS/EIS would be denied.
Overall, what you are proposing may be possible but would need to be very carefully monitored, especially as HMRC change the rules all the time
You really need professional advice on this.
But - increase your dividends to use the income tax relief? Yes
Buying the shares back - should be possible for the company to buy back the shares (if it has reserves). This would be a dividend but if you receive no more than you paid, then should be no income tax. However, you cannot have any "arrangements" in place to allow you to exit when you make the investment, so care is needed.
Reciprocal investment - HMRC are very alert to this and it is specifically given as an example in their manuals where SEIS/EIS would be denied.
Overall, what you are proposing may be possible but would need to be very carefully monitored, especially as HMRC change the rules all the time
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