How does winding down a startup impact seis & eis tax relief in the uk?

What happens for your SEIS & EIS investors if things don’t work out with your startups and you call it a quit? There are different scenarios to consider while keeping in mind the investors who supported you since the beginning of your journey.

First, let’s remember that to qualify for SEIS/EIS tax relief, you must satisfy a number of conditions. On the company side, the main criteria are:

• Be based in the UK and have a permanent establishment
• Not be listed and not planning to list within 2 years
• Have less than 25 full-time employees and then £350,000 in gross assets for SEIS, or less than 250 employees and less than £15m in gross assets for EIS
• Carry out a qualifying trade and not be engaged in any excluded activities like financial services, property development, or farming
• Use the investment proceeds for the qualifying trade within 3 years

On the investor side, the main criteria are:

• To be a UK taxpayer and over 18 years old
• To not hold more than 30% of the company’s share
• To not be an employee of the company unless they are also a director
• To pay for the shares in full and in cash
• To hold the shares for a minimum of 3 years

There are also several criteria relative to the shares:

• Must be ordinary (although some lawyers found a clever way around this), non-redeemable, with no preferential rights
• Raise no more than 3250,000 through SEIS and the rest later through EIS

What happens to SEIS and EIS tax reliefs when we wind down?

It depends on a few factors and should be assessed carefully on a case-by-case basis. The first and critical distinction is whether or not you voluntarily shut down.

Scenario 1 — Your startup is insolvent

If a resolution is passed to enter into a CVL or the court makes an order for the winding up of the company (court-mandated liquidation), or if the company is dissolved, the company will fail to satisfy the ‘trading company’ condition for tax relief. However, this failure is disregarded where the winding up or dissolution is for genuine commercial reasons — usually that the company is insolvent. So, in this scenario, it is unlikely that HRMC will withdraw the tax relief from the investors. This is precisely for this scenario — and its opposite — that the scheme was put in place in the first place.

Scenario 2 — You decide to enter voluntary liquidation

But what happens if the company decides to shut down voluntarily? As for the above, SEIS/EIS investors might be eligible for loss relief if the company is voluntarily wound up for genuine commercial reasons — in this case, the likeliness of becoming insolvent. The key is that the voluntary liquidation or shutdown must be for legitimate business reasons, even if the company is not technically insolvent. As long as this criterion is met, the investors can still claim the various tax reliefs associated with SEIS and EIS investments, but only in the case of MVL (Members’ Voluntary Liquidation). Suppose the company is simply struck off the register. In that case, the investors may not be eligible for this loss relief, and any distributions over £25,000 would be treated as income and subject to higher income tax rates rather than the more favourable capital gains exemption of an MVL.

Scenario 3 — You sell your startup

Loss relief will still be available to your investors as long as they receive less for their shares than what they paid for initially. In that case, the rule of 3 years does not apply — they still will be able to tax deduct the loss. Note that if you were to sell the shares for more than what was paid for within 3 years, your investors would not be eligible for Capital Gains Tax (CGT) exemption and might have to repay HMRC their Income Tax relief.

Scenario 4 — You go “Dormant”

Your company is still registered at Companies House but has no activity. This is not great for your investors because you can’t return them their capital — if there is anything to be returned — and they can’t claim loss relief unless they are able to make a negligible value claim while still holding their shares. You should only consider going dormant if you need a break and think your startup might make a comeback.

Do we need to do anything specific to ensure our investors can claim these reliefs?

As you navigate the winding-down process, keeping clear records and communicating with your investors is critical. They’ll need accurate information about their investment and the company’s closure to claim relief. You don’t need to navigate this alone, though — seeking advice can ensure you’re dotting the i’s and crossing the t’s for everyone’s benefit. Read more about SEIS/EIS loss relief for investors at the gov. uk website.

Conclusion

While winding down isn’t the outcome anyone hopes for, SEIS and EIS were designed with the understanding that not all startups succeed. These schemes offer a cushion for investors, acknowledging the risks they take by supporting startups like yours. Loss relief, in particular, is a way to recognise their contribution and mitigate their financial loss.

Remember, the end of this journey could be the start of a new adventure, benefitting from invaluable lessons learned and relationships built.

FAQs

• For Investors: Generally, as long as they’ve held their shares for the minimum period (3 years for both SEIS and EIS), investors can keep their initial income tax relief. If your startup hasn’t done as hoped, they might be eligible for loss relief, which can soften the blow by offsetting losses against their income or capital gains tax.
• Capital Gains Tax (CGT) Exemption: If investors make a profit on their shares (we all hope for a positive outcome, even in tough times), this gain is usually exempt from CGT, provided they hold the shares for the required period.
• What if we wind down before 3 years? If the company closes and the shares are disposed of before the 3-year mark, investors could lose some of the tax reliefs they initially claimed. However, loss relief might still be an option, depending on the circumstances.