My best and worst SEIS investments – and what I learned along the way

Since starting Wealth Club, I’ve made a fair number of SEIS investments, backing nearly a hundred very young – and hence very risky – private companies. Some of these investments have worked very well, many haven’t, and with others the jury is still out.

But the impact of SEIS tax relief has proved fundamental to my overall return in each case for these high-risk holdings, irrespective of the investment outcome.

As a reminder, SEIS offers a generous and relatively simple annual allowance of up to £200,000. When you invest, you receive up to 50% income tax relief, and you can also offset 50% of a capital gain if you reinvest it into SEIS. Provided the shares remain qualifying over the time you’re invested, any growth is free from capital gains tax, and shares held for at least two years and on death could receive attractive inheritance tax benefits. If an investment falls to zero, losses (net of income tax relief already received) can be offset against income tax at your marginal rate.

For a top-rate taxpayer claiming all available reliefs at current rates, even if an investment fails completely, the effective loss on £1 invested can be as little as 15.5p. Of course, if things go well, returns could be significantly enhanced.

How might that work in practice? To illustrate the principle of how tax relief affects overall returns, here I analyse my best and worst SEIS investments to date – you will have to form your own view.

As ever, please note tax rules can change (and regularly do) and the value of tax benefits depend on your circumstances. SEIS-qualifying investments do offer valuable tax benefits to help mitigate the considerable risks, but you should make a careful decision on where you invest, rather than relying on the tax relief alone.

In 2020/21 I subscribed £88,000 to an SEIS fund, with £85,360 invested after fees, and my capital was deployed across 29 companies.

At the time, CGT was 20% and, in addition to £42,680 income tax relief, I was able to claim £8,536 off my CGT bill. Consequently, 60% of my investment cost was effectively covered by tax relief.

Of my 29 investments, four have now exited, partially or fully, generating cash proceeds in three of these cases. These companies achieved return multiples ranging from 0.9x to 6.2x, providing me a cash return of £17,732. This is my personal experience and past performance is not a guide to the future.

After five years, nine of the original 29 companies have failed. These holdings equated to a total cost of £21,631 out of the original £85,360 I invested.

The rest are still going. Time will tell how they fare.

But with failures comes a silver lining known as loss relief. Under SEIS, if an investment fails you can offset the effective loss against the income tax you have received at the start.

So, in my case, £21,631 of my investments have failed to date. I have already received half of that back (£10,815.50) in income tax relief. Of the remaining £10,815.99 loss I can claim back up to 45% (£4,867)

My remaining portfolio, now comprising 19 companies after excluding failures and full exits, is valued at £181,979. That being said, SEIS investments are inherently illiquid and there would need to be exits from these remaining companies for me to receive a cash return.

The least successful SEIS investment I have ever made was in 2016. 

I invested £37,000 in an SEIS fund, and my capital was deployed across six companies, of which four have so far been written down to nil. The other two are currently valued at £5,300. But thanks to the combination of tax reliefs, it doesn’t look too bad.

After considering £18,500 income tax relief and £5,180 CGT relief, the effective cost of my investment was £13,320.

Furthermore, when factoring in loss relief on the four companies that have already been written down, I am currently looking at an effective loss of £2,777.50. If the remaining two companies were to fail, as is quite likely, I would be able to claim an additional £3,082.50 in loss relief, bringing my effective loss to £4,995.

In other words, even in a complete wipeout scenario, my maximum loss would be £4,995 on a £37,000 investment.

Another way to look at it is this: if I had paid the income tax and CGT upfront, rather than investing in SEIS, I would have been left with £13,320 to invest elsewhere. For that sum to deliver the same effective outcome, it would have needed to grow at 7% per year for around 15 years and five months.

So, while this SEIS investment has clearly been disappointing, in my particular circumstances and based on the tax reliefs available to me, I view the overall outcome has so to be better than if I had simply paid the tax in the first place and invested the remainder elsewhere instead. Others may experience very different outcomes.

Are SEIS investments risky?

Absolutely. You are backing portfolios of unproven startups, and many will fail.

Is the risk worth taking?

For me, it was, but that is a personal decision.

There are two key lessons I’ve taken away. 

First, diversification is critical. Where possible, I think it is wise to invest through an SEIS fund. If a fund only makes a small number of investments, you may want to consider spreading capital across multiple managers. Concentration dramatically increases the likelihood of painful outcomes.

Second, the UK tax burden is at a record high. So, if your investments are not in a tax shelter, they would need to work much harder to cover the tax before you can benefit from any effective growth. SEIS is one of the most generous tax shelters, with tax relief enhancing returns when things go well and dampening losses when they don’t.
 
SEIS can be great. But it rewards discipline, patience and diversification and it demands a strong stomach. And, of course, you should never invest money you can’t afford to lose.