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SEIS investment in my brother's company - is this dodgy?

LiveForever
Posts: 3
Joined: Thu Nov 12, 2015 10:34 pm

SEIS investment in my brother's company - is this dodgy?

Postby LiveForever » Sun Jul 16, 2017 5:25 pm

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, advertising budget 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 £100,000 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 a 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 additional tax charge of £50,000. Can I then use the tax relief from the SEIS investment to offset my personal tax on these dividends? If yes, this would be great as I wouldn't need to pay NI on the extra dividend which I know couldn't be recovered as tax relief.

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. But 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.

Could he use pre-tax profits from his company to buy back my shares? Or would he need to purchase the shares from his own personal income?

If he could use the company's funds to buy back my shares, lets say he buys it for £100,000. In that instance I would in effect have £50,000 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? So it would end up looking like a reciprocal arrangement, giving him similar tax advantages, although of course this wouldn't be the main objective.

Would be very interested to hear other people's view on if this sounds dodgy or reasonable?

AnthonyR
Posts: 174
Joined: Wed Feb 08, 2017 2:33 pm

Re: SEIS investment in my brother's company - is this dodgy?

Postby AnthonyR » Tue Jul 18, 2017 9:46 am

Seems fine in theory.

You can invest in your brother's business and claim SEIS assuming the company qualifies (siblings are not connected parties).

You can increase your personal tax by taking dividends to cover the tax relief.

There are mechanisms which allow a company to purchase their own shares - however the rules are complex and generally require the cash in the company, the shareholder to substantially reduce their shareholding and more importantly for there to be a genuine commercial reason, otherwise it's taxed as income.

As per your brother making an investment in your business, technically there's no issue with this - but it shouldn't be based on the first investment in any way. As you mention there are restrictions on reciprocal arrangements. However, on the basis that your investment has been made several years before and your brother decides to invest some of his cash in your business that shouldn't be a problem. If a condition of your investment is that he will invest in your business in the future then this is likely to be caught regardless of the timeline.
Anthony Rogers CTA
Fusion Partners LLP
anthony@fusionpartners.co.uk


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