ACCA Advanced Taxation (ATX) Practice Exam

What action is recommended if SEIS shares are sold within 3 years?

1. The initial investment is returned

2. Relief is enhanced

3. Relief is withdrawn

4. The gain becomes tax-free

The correct answer is: Relief is withdrawn

When shares that qualify for the Seed Enterprise Investment Scheme (SEIS) are sold before the three-year holding period is complete, the tax relief that was initially granted on the investment is withdrawn. This is because SEIS is designed to support long-term investments in early-stage companies, and the tax incentives associated with it are contingent upon holding the investment for a minimum period. If the shares are disposed of (sold) within three years, the tax relief that may have been claimed on the investment, such as income tax relief or capital gains tax relief, becomes invalidated. As a result, any benefit obtained from this relief is reversed, requiring the investor to account for any tax implications as if the investment had never qualified for the relief in the first place. The choices that mention enhanced relief or a tax-free gain do not apply in this context; the focus is strictly on the implications of selling SEIS shares prematurely. The option regarding the initial investment being returned also misunderstands the mechanics of SEIS—investors retain their investment unless the company is liquidated, but the tax benefits are what are at stake concerning the holding period.