How SEIS Investors Can Claim Loss Relief After a Company Dissolves

The Seed Enterprise Investment Scheme (“SEIS”) offers investors significant tax reliefs, including loss relief, in cases where their investment results in a financial loss. Importantly, this relief remains available even when a company is solvent and voluntarily decides to dissolve, rather than being liquidated due to insolvency. Below we explain how SEIS loss relief works in such scenarios.

What is SEIS loss relief?

SEIS loss relief allows investors to reclaim a portion of the money lost when the value of their investment decreases. This applies if an investor sells or disposes of their shares for less than the original investment amount.

Loss relief can be offset this loss against either their capital gains or income tax, depending on their individual tax circumstances.

Claiming SEIS loss relief for a solvent company’s voluntary dissolution

When a solvent company opts for voluntarily dissolution (for example, after achieving its objectives or due to the founders’ decision to move on), investors can still claim loss relief, provided they incur a capital loss. A capital loss occurs when the shares become worthless or the amount returned to the investor is less than the original investment.

How the relief works:

1. Capital Loss Claim: investors can report the loss to HMRC; or
2. Income Tax Offset: investors can offset the loss against their income tax for the year the loss occurred or the previous year. This can result in a tax refund at the investor’s highest tax rate (e.g., 40% for higher-rate taxpayers).

Example of SEIS loss relief

An investor puts £10,000 into a SEIS-qualifying company. The company later dissolves, returning £2,000 to the investor.

• The capital loss is £8,000 (£10,000 investment minus £2,000 returned).
• If the investor is a higher-rate taxpayer (40%), they could offset the loss against their income tax, potentially reclaiming £3,200 (40% of £8,000).
• Alternatively, the loss can be offset against capital gains.

Conditions for claiming SEIS loss relief

To qualify for SEIS loss relief, the following conditions must be met:

1. Qualifying Shares: the shares must have been SEIS-qualifying when purchased;
2. Genuine Disposal: the shares must be disposed of through a genuine event, such as dissolution or liquidation; and
3. Reporting to HMRC: the investor must report the capital loss to HMRC, providing documentation of the original investment and the outcome of the disposal.

Key considerations for investors

• Documentation: maintain records of the original investment, the company’s dissolution, and any payments received during the dissolution process;
• Deadlines: be mindful of the deadlines for reporting capital losses and claiming income tax relief, to ensure eligibility for SEIS loss relief.

Frequently asked questions

Are there restrictions on how I offset the loss against income tax?

Loss relief can be offset against your income tax liability for the current tax year or the previous year. However, it cannot be carried forward indefinitely, so it’s essential to act within the applicable tax years.

What happens if HMRC challenges the dissolution as not being a "genuine disposal"?

HMRC may scrutinise cases where the dissolution appears contrived or artificial. To avoid this, ensure that the dissolution process is legitimate and well-documented, and that the company’s decision to dissolve aligns with its objectives or operational realities.

Can SEIS loss relief be combined with other investment reliefs?

Yes, SEIS loss relief can complement other tax benefits under SEIS, such as income tax relief and capital gains tax exemption. However, you cannot claim loss relief on the same loss twice (for example, both against income tax and capital gains tax).

How does SEIS loss relief interact with inheritance tax planning?

SEIS shares can qualify for Business Relief, making them exempt from inheritance tax if held for at least two years. If the shares are disposed of at a loss before this period, you may claim SEIS loss relief while still benefiting from partial inheritance tax planning advantages.

What if I hold SEIS shares through a nominee or trust?

If shares are held through a nominee or trust, you may still be eligible for SEIS loss relief, provided the underlying investment meets SEIS requirements and the disposal is genuine.

Summary

SEIS loss relief is available to investors even if a company voluntarily dissolves while remaining solvent. By understanding the requirements and conditions, investors can take advantage of the tax relief available under SEIS, ensuring that their investment remains tax-efficient even in cases where the company decides to wind down.

How we can help

The Jonathan Lea Network is a leading authority on SEIS and EIS matters, offering expert guidance to investors and businesses alike. If you require help, we usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT to £350 plus VAT* depending on the complexity of the issues and seniority of the fee earner).

Ensure your SEIS investment remains tax-efficient, even in challenging scenarios like voluntary dissolutions. Contact The Jonathan Lea Network today to learn more about how we can support you with SEIS loss relief and other related matters.

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.