Why should you consider SEIS investment opportunities for your portfolio?
As one of the UK's most generous investment schemes when it comes to tax reliefs and incentives, many investors are aware of what the Seed Enterprise Investment Scheme (SEIS) is.
Very similar to the Enterprise Investment Scheme (EIS) - often known as its sibling scheme, in fact - the differences between the two are small but important, with the SEIS generally covering companies that are particularly early stage in their journey.
But whilst many may know about SEIS, so many do not. And this doesn't just account for non-investors - although it's been in operation since 2012, many experienced investors aren't aware of the true potential of the SEIS.
And this is a shame for both investors and entrepreneurs building startups. Yes, SEIS investments are generally higher-risk investment options, but the potential returns are also higher than many other options, too. What's more, the generous SEIS tax reliefs on offer are designed to help mitigate this level of risk involved.
Whilst any investment should always be made further to completing the necessary due diligence, exploring the different investment opportunities available is always a recommendation - it's a great way to start adding diversity to your portfolio via venture capital - and so with that said, today I wanted to look at why an investor should consider adding SEIS investments to their portfolio.
You're backing the next generation of British businesses
The Seed Enterprise Investment Scheme was introduced by the HMRC in 2012 and its purpose is to incentivise investment into small companies and startups so they can get the funding they need to scale up and gain traction in their market.
The younger sibling of the Enterprise Investment Scheme (EIS) which was introduced in 1994, SEIS applies to much smaller firms - to be precise, those employing up to 25 people, with assets of up to £200k.
With the level of funding a company can raise under the SEIS capped at £250,000, the entire purpose is for investors to help the next generation of British businesses get off the ground. The entrepreneurs will have an idea and prove to some extent that it's working (or will work), and need the financial backing and general business support to help them move forward and to implement their growth strategy.
The tax reliefs available are extremely generous
The EIS tax reliefs available are considered some of the most generous available to UK investors.
- 30% income tax relief.
- Capital Gains Tax and Inheritance Tax exempt.
- CGT deferral relief.
Combined they can provide one of the most tax-efficient ways to invest capital.
And whilst similar, the SEIS' tax advantages go a step further and provide arguably the most generous reliefs available with UK venture capital.
For example, the income tax relief increases to 50%. This means that if you invested £1,000 into an SEIS-eligible company, you could immediately offset £500 from your income tax bill.
Like the EIS, when it comes to the exit event of your investment, if you make a profit, you will not be subject to Capital Gains Tax. However, the Capital Gains Tax benefits don't end there, as investors have the ability to effectively write-off 50% of a capital gain regardless of how it was realised.
By investing the capital gain into a SEIS-eligible investment opportunity, you can claim 50% tax relief on it. This means that if you had a taxable capital gain of £10,000, which attracts a liability of £2,000, investing that £10,000 into a SEIS company would allow you to reduce the taxable gain to £1,000.
This is achieved by reinvesting a capital gain into an SEIS-eligible company, through which you can claim tax relief that will half your CGT liability. If you invest a taxable capital gain of £10,000 that attracts a CGT liability of £2,000 in an SEIS-eligible company, this CGT liability will reduce to £1,000.
With loss relief also available (for either income tax or Capital Gains Tax), once all applicable tax reliefs are benefited from, an investment into a SEIS eligible investment opportunity could reduce your capital at risk to just 13.5p in the pound.
Entrepreneurship fuels entrepreneurship
The investment and startup economy is one that very much follows a circle for everyone involved. The more investment that's made, the more organisations are supported on their journeys forward.
Whilst not all companies will succeed, those that do often go on to raise further investment and become more successful (and the team that don't succeed will not often stop there, instead going on to use their entrepreneurial mindset to start further businesses).
By investing in the next generation of British businesses, you're fuelling the country's entrepreneurial mindset, ambition and passion. You're investing in the potential future sector leaders; the companies who are out to make a real change and revolutionise their industries.
When you're investing in SEIS companies, you're investing to make an impact and a difference.
Determining if SEIS investments are right for you
With high risk can come high return. There is no doubt that investing in SEIS-eligible companies is much more of a higher risk strategy, as by their nature these companies have less traction than those further on; companies that are already established and have been trading for multiple years.
But if you are more open to risk as an investor, are keen to access the benefits of alternative investments, and enjoy the potential to generate a significantly higher return on your investment, SEIS investment opportunities could be a worthwhile option for you.
Do remember that before investing you should always do your due diligence and independent research. This can differ from investor to investor, but can be making sure the company is operating in a sector that you are comfortable with, know well or have invested in before, or having confidence in the team behind the company, ensuring the people are those you feel you can back confidently with your hard-earned capital.
Whether you invest or not is entirely up to you and your circumstances. SEIS is extremely popular, with over £600m of investment made into SEIS opportunities in 2016 alone, and the scheme does offer particularly generous tax reliefs to UK investors, but you should always feel confident in the opportunity before investing - though if you do, the returns could very realistically be worth the risk.