Compelling SEIS potential

This article is part of
VCT and EIS Investing - January 2013

Seed EIS (SEIS) funds are investment vehicles created last year by the government to help kick-start economic growth through investment in small start-up companies.

In some ways they are the racier cousin of the enterprise investment scheme (EIS), which is designed to serve a similar purpose only investment is permitted in larger and more mature companies than in an SEIS.

However, if you read ‘racier’ for higher risk, you would be wrong. One of the really interesting things about SEISs is that – for investments made in this tax year at least – they come with a copper-bottomed guarantee from the government that top-rate taxpayers cannot lose any money.

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In fact, even if all the underlying investments were to fail completely, 50 per cent taxpayers – who also claim a special capital gains tax (CGT) reinvestment relief – could potentially end up with tax relief amounting to 103 per cent.

For this to happen the investment would need to fail in the current tax year and perhaps more realistically, should losses occur, it would be in a subsequent tax year. In this case these same individuals would now most likely be 45 per cent taxpayers and their tax relief would instead be 100.5 per cent.

The 103-100.5 per cent tax relief on losses for top-rate taxpayers works like this – £100,000 is invested in an SEIS in the current tax year, receiving 50 per cent income tax relief. The taxpayer has a capital gain which is realised in 2012/13. This is reinvested in an SEIS and the capital gain – taxed at 28 per cent – will be exempt.

If the investment fails, the net investment after income tax relief – £50,000 – is also available to offset against taxable income. A 50 per cent taxpayer gets loss relief of 50 per cent of their net investment, which is another £25,000. In total, this equals 103 per cent. If losses were realised in a subsequent year, for a 45 per cent taxpayer the same applies but total relief equals 100.5 per cent.

This is a unique situation and means top-rate taxpayers cannot lose if they invest this year. For investors unable to make use of the CGT reinvestment relief, the 50p tax credit they receive is still far superior to the 30 per cent on an EIS or VCT.

But there is more to SEISs than just tax relief. Its fundamental purpose is to encourage entrepreneurship and help reinvigorate the economy. As such, the government hopes they will become a permanent fixture of the fundraising and investment landscape. So far, only a handful of funds have launched and awareness could be greater.

There is no doubt start-ups are a risky area for investment – and that is why for every pound invested, the government is providing up to 78p. But unless a SEIS business succeeds, this will count for little. Fortunately there are ways of mitigating the risk.

SEISs offer a highly compelling mix of unbeatable tax relief and investment return potential – and that’s without taking into account the unique situation for top-rate taxpayers who invest this tax year.