How to choose which SEIS portfolio to invest in
The SEIS market is still very young (it only really got going towards the end of the 2012-13 tax year, so just over five years ago). This means that there have been hardly any exits to date, and none of the few SEIS portfolio managers in the market so far have a clearly defined track record. Having said that, they may have made some investments four or five years ago which have not yet exited but are currently valued at large multiples to cost, based on the most recent price at which shares have been issued. The investment adviser we are working with has several such investments, one valued at 70 x original cost and another at 30 x!
What are the Pitfalls?
One fairly common pitfall is companies which by mistake issue Enterprise Investment Scheme (EIS) shares before they have finished issuing SEIS shares. This is referred to as “misfiling”. It is important to understand that once shares have been issued and EIS relief applied for, you cannot subsequently apply for SEIS. For example, if a company is raising £500,000 via a combination of SEIS shares (up to £150,000) and EIS shares (the balance of £350,000), it must finish issuing the SEIS shares before it moves on to issuing the EIS shares. The two classes of shares should be issued on different days to avoid any argument with HMRC.
Many people are attracted to SEIS portfolios primarily on account of their ability to write off part or all of a capital gain. It is essential, however, that the investor also claims income tax relief, as the capital gains tax (CGT) relief will not be available unless income tax relief has been triggered. Similarly, SEIS loss relief will not be available. This situation sometimes arises with retired people who no longer have much income but dispose of an asset (a second property for instance) and are looking for ways of mitigating the CGT. When discussing a potential SEIS portfolio investment for someone with a capital gain I am always careful to point this out.
Spreading investment under SEIS
Many investors will be investing in SEIS funds rather than single company offers, which is definitely the right approach as the risk is spread over a number of investments. These funds are almost always structured as discretionary portfolios, with the manager picking the companies and making the investments over a period of several months. This means that you get a separate tax certificate for each of the investments. It’s quite a fiddly business keeping track of all the forms, especially as they likely to arrive on different dates spread over several months.
By law, you cannot claim your SEIS relief until you are in possession of the tax certificates (known technically as SEIS 3 forms). It’s still a paper driven system. HMRC announced some time ago that it was proposing digitalising the system but so far it has not done so, and some people think HMRC is having second thoughts about whether to digitalise, because of potential fraud. So we are stuck with the paper system for the foreseeable future. If you don’t feel up to dealing with the plethora of forms, we would suggest leaving it to a professional to take care of on your behalf.
In conclusion, the Seed Enterprise Investment Scheme does offer a very generous cocktail of tax benefits, which are skewed in favour of the investor in order to compensate for the risk of investment in a seed company That being said, if your investments make gains, the gains are free of tax. And if some of your investments make a loss, you can claim loss relief, but this is not off-settable against your gains.
For more information about SEIS, get in touch with the team today.
Our investment products may place your capital at risk and the value of them may go down as well as up and an investor may not get back the amount they invest. Investments in unquoted early stage/small companies and funds that invest in these smaller companies, including but not limited to, the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Schemes (EIS) are high risk and you should not invest unless you can afford total loss or if you are likely to require the capital in the near term since such investments can be difficult to realise.
The tax treatment of the investments depends on the individual circumstances of each investor and may be subject to change in future. The availability of tax reliefs depends on the Company invested in maintaining its qualifying status. This information provided on our website is based on our understanding of current taxation law and HM Revenue and Customs practice, which may change in the future. The content of our website is not intended to constitute investment, tax or legal advice. Neither past performance or forecasts are reliable indicators of future results and should not be relied upon. We recommend you seek independent advice before investing in our investment products.