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Even if a company flops, higher earners could still make a profit
Thursday 30 Mar 2017 Author: Emily Perryman

If you have a large tax bill to pay and a high risk tolerance, investing your money into Seed Enterprise Investment Scheme (SEIS) companies could reap significant rewards.

Like its older cousin the Enterprise Investment Scheme (EIS), the SEIS is designed to help early-stage companies raise finance by offering generous tax reliefs to investors. You can invest up to £100,000 a year into SEIS qualifying companies and get income tax relief of up to 50%, assuming you hold the shares for at least three years. If you invest the full £100,000 you’ll effectively wipe £50,000 from your tax bill.

SEIS also offers 50% capital gains tax (CGT) relief. If you had a £28,000 CGT bill, contributing to SEIS could halve this bill to £14,000. The overall cost of investing £100,000 into SEIS could therefore amount to just £36,000.

The risks

These generous tax breaks are available because SEIS is a high risk form of investment. Companies that qualify for the scheme must have commenced less than two years ago, have gross assets of less than £200,000 and have fewer than 25 employees. They’re very early-stage businesses and the chances of them failing are high.

This shouldn’t necessarily make you run for the hills. SEIS offers ‘loss relief’, meaning any losses can be written off against income tax or CGT.

Alex Davies, co-founder and chief executive at Wealth Club, says even if the investment was completely wiped out the maximum a 45% taxpayer could lose (assuming they had used both income tax and CGT reliefs) would be £13,500 on a £100,000 investment.


SEIS certainly isn’t for everyone. Davies says unless you know the business could do amazingly well, you should only consider SEIS if you’ve got tax to pay.

‘SEIS is most suitable for people with a large income tax bill and preferably a CGT bill too. When this is the case your investments really don’t have to do very well (in fact they can do pretty badly) and you can still make an effective profit. And if it all goes wrong then the downside is really mitigated,’ he explains.

Even then, experts recommend not investing more than 10% of your wealth into SEIS, EIS and venture capital trusts collectively.


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How to invest

You can invest in individual SEIS qualifying companies or in SEIS funds, which helps to spread risk. Davies says if your goal is to benefit from the tax reliefs and make a small profit it’s worth trying to find the companies with the lowest risk possible.

Some of the most popular type of SEIS funds invest in the media and entertainment sector, with 40% of those focusing on TV and film production.

‘It is a very good fit for SEIS as you can do quite a lot on a low budget and there is a huge demand for content. When people think of media they often think it is very risky and relies on production companies having a hit. This isn’t true. Providing you produce the right type of content, there should be a buyer out there and you will have a good idea what they will pay for it before you spend the money developing the idea,’ Davies says.

An example is Goldfinch SEIS Fund, whose successes have included TV programme ‘Go-8-bit’ hosted by Dara O’Briain.

There is also a music SEIS, the Amplify 5 SEIS, which invests in five recording artists. Investors get access to all the different revenue streams they generate. The bands are generally cult bands that have a good and predictable following.

‘Even if no tickets are sold, the tour financiers (i.e. the SEIS company) should get half their money back. When coupled with up to 50% income tax relief under SEIS this can provide attractive downside protection,’ Davies says.


Doing your homework

If you want to invest in individual companies you’ll need to really do your homework. Mark Brownridge, director general of the EIS Association, suggests getting hold of the company’s business plan, talking to the directors, and finding out the exit strategy.

‘You need to ascertain how you’ll get your money back – and hopefully some money on top of that. This will usually be through a trade sale or a liquidation of shares. Check whether the managers have had experience of exits before,’ advises Brownridge.

Although you need to hold shares for at least three years to qualify for tax relief, this doesn’t necessarily mean you’ll get your money back that quickly. Tom Britton, co-founder of SyndicateRoom, says technology businesses can take around 10 years to exit and because SEIS companies are illiquid there won’t be an opportunity to sell your shares any earlier.

‘These are not get in and get out investments,’ he states.

SyndicateRoom is a platform that lets you directly invest in individual companies alongside angel investors. Companies that have previously raised money through the platform include collaborative blogging platform Niume and hotel booking system Inn Style.

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