The highs and lows of the SEIS
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
The highs and lows of the Seed Enterprise Investment Scheme – some examples
The Seed Enterprise Investment Scheme (SEIS) is designed to encourage investment into the smallest, youngest companies in the UK.
To qualify, a company must have been trading for under two years, have gross assets below £200,000 and fewer than 25 employees when it allots the SEIS shares. There’s also a £150,000 limit on the amount any one company can receive – which means many are little more than a good idea looking for the money to prove it can work.
Businesses this young are very risky investments. For that reason, the government offers generous tax breaks to those willing to risk their money, in the hope one day it will drive significant job and wealth creation. The potential for high growth and tax relief can make a powerful combination for those who can tolerate these risks. Tax rules can change and benefits depend on circumstances.
Given the risks and the time required to source investments, many investors choose to spread their money over several companies through a SEIS fund. To get an idea of what happens – both when investments work out and when they don’t – we’ve had a look at two funds from a leading SEIS fund manager.
The manager’s 2017 SEIS/EIS fund (below) included 10 SEIS investments. Five years on, eight of those SEIS companies are still trading, showing gains of up to 5.7x, while two companies have failed and been written down to zero.
What does this mean for the underlying investors? Hypothetically, had they invested £10,000 spread evenly over all 10 companies, they would now have a portfolio worth £29,449.34 – including £862.58 returned in cash. Throw in income tax relief and the value of potential loss relief on the two failed business and they could be looking at a total current value of £34,899.43.
Performance of SEIS investments in a SEIS/EIS fund per £1,000 invested into each company – a total of £10,000 invested over 10 companies.
Note: in reality, investors are unlikely to have received an even allocation across all 10 companies and each portfolio is likely to be different. Tax rules can change and benefits depend on circumstances.
It’s also important to note that the current value is based on the manager’s assessment of value, as there is no ready market for these unlisted shares. It will include realised returns (where cash has been returned) and unrealised returns (where cash has not yet been returned).
... and the lows
Clearly not all SEIS investments are going to be this successful. But it’s in less successful investments that tax relief arguably comes into its own.
Consider the same manager’s 2016 SEIS fund. It also featured 10 SEIS-qualifying investments, but six of them were written to zero due to the businesses failing. Despite some success among the remaining companies, overall a £10,000 subscription would currently be valued at £8,449.
However, once you add income tax and the value of potential loss reliefs on those companies which have fallen to zero, investors could be looking at a total current value of £14,798.84.
Performance a SEIS fund per £1,000 invested into each company – a total of £10,000 invested over 10 companies.
Recent SEIS successes
Generous tax breaks help offset some of the risks when investing in very small companies. But the real attraction of SEIS remains the opportunity to invest in some of the UK’s fastest-growing and most exciting businesses right at the start of their journey.
Past successes from our featured SEIS offers include:
Startup Funding Club SEIS Fund – Cognism
In 2016, SFC Capital invested in sales and marketing tool provider Cognism, which uses machine learning to help sales and business development professionals find prospects.
In 2020, the company announced annual recurring revenues were over $11 million and it featured in the LinkedIn Top Startups list for the third year in a row.
The company has recently raised £63.8 million from a consortium of global investors and the business is now valued at greater than £200 million.
Haatch Ventures Seed Enterprise Investment Fund - Poplar
In 2019, Haatch Ventures invested in SEIS-qualifying augmented reality (AR) design platform Poplar. The platform aims to simplify the production of AR content and provides collaborative tools that make AR production quick and affordable.
The company was named as a Top UK 100 Start Up in 2020 and has worked with blue-chip clients from Disney and GlaxoSmithKline
Of course, as our 2016 and 2017 examples above set out, for all these successes there will be multiple failures. There’s no guarantee any given SEIS portfolio will include one of these standout successes. You could lose all your capital and you should only invest money you cannot afford to lose.
How can you find out more?
For those interested in SEIS investments, you can read our reviews of several funds online. Those marked with a golden “W” are our “featured offers”: funds that, in our view, have the most investment merit. Note, this is not advice nor a personal recommendation to invest – you should form your own view.
We also provide a free factsheet to SEIS investments, outlining the various tax benefits of the scheme.
Free factsheet: SEIS at a glance
Download your free factsheet to read more about the tax benefits, including:
- Up to 50% income tax relief – get back half of what you invest
- Enjoy tax-free growth
- Halve capital gains liability from other investments
- Offset any losses against your income, so you save income tax
- Pass on your investment free of IHT
Remember, tax rules can change and tax benefits depend on circumstances.
Fund manager performance
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
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