It is a great pity that most advisers have dismissed Seed EIS out of hand because they see it as an investment that is just too risky for most clients. It is a pity for three very powerful reasons, and it really is time to think again about Seed EIS.
The value of start-up businesses
First of all, in the current economic climate, more and more people are looking to set up their own business. Many have great ideas that are seeking to take advantage of technological change, and the ‘new normal’. It is new businesses that will underpin our economic recovery and growth in the years to come. It is start-up companies that will provide jobs, pay taxes, and benefit communities. But many need a helping hand to lift them off the runway.
The most generous tax reliefs
Secondly, Seed EIS offers the most generous tax reliefs available from the government today, although tax reliefs are subject to personal circumstances.
It offers 50% Income Tax Relief, as well as Capital Gains Tax and Inheritance Tax benefits. But the tax benefit that is often overlooked is that of Loss relief.
Loss relief can be claimed at half your marginal rate of tax, should the company fail. For a 45% tax payer, this is a further 22.5% of tax relief, so that effectively 72.5% is underwritten from the outset, meaning that the amount at risk is just 27.5% of your investment. For example, if you make a £10,000 investment and the startup fails (your investment is no longer worth anything) you could claim loss relief. Firstly you could claim the 50% income tax relief (£5,000 in this example). Then of the remaining £5,000 you can claim 45% income tax relief on this £5,000 loss, so your total loss is only £2,750. This means that it doesn’t take many successful companies in a SEIS portfolio to make it a profitable investment. Of course the tax relief is there to compensate for the risks involved, but the potential for genuine growth is also high.
The critical difference
At Nova Group we started investing in start-up companies in 2008, which was four years before the government introduced Seed EIS, to build on the success of EIS. What this means is that we have learnt a great deal about which companies and founders are most likely to succeed, and what support is needed to give them the maximum chance of success.
What we appreciated at the outset was that it is very early on in a company’s life that they need a lot of expert help, at the very time that they are unable to afford it themselves. We also learnt that the needs of different companies are not the same, and so flexibility of resources is the key.
In response to this need we put together an expert pool of support resources. These include software and hardware engineers, computer programmers, brand specialists, marketeers, finance specialists, project developers and project managers, and much more. We developed a flexible approach so that we could draw on these specialist skills, as and when they are needed.
Then, over time, as the company generates revenues and starts to become profitable, we help them to become independent, and start to recruit their own staff, at the time that they can afford it. It creates a natural transition to profitable growth.
The other difference that we appreciated early on is that with the best will in the world, and the most stringent selection criteria, some companies will fail. After all, circumstances change. We only have to look at the unexpected arrival and impact of Covid-19 to understand this, although in the instance of Covid-19, it has also opened up many opportunities for entrepreneurs. That is why we offer a very diversified portfolios of companies that we invest in. This means that we will aim to invest in at least 20 companies every year knowing that sadly some will inevitably fail. As SEIS invests in very small companies, this risk is greater than with other investments. Small companies are more volatile and more likely to fail than their larger counterparts. But what we do know is that our success rate of growing profitable companies is above the average.
By investing early in a company, investors catch more of the upside in their value than later investors do. This makes Seed EIS, done our way, a very exciting place to be for investors.
The practical use of SEED EIS
Given the levels of tax benefits, Seed EIS has to be an important tool in financial and tax planning subject to personal circumstances.
But more than that it adds an important new ingredient in portfolio diversification. It is in a market that offers prospects of real growth, when few other markets today offer this potential. We think it is time to look differently at Seed EIS.
Capital is at risk – the value of an investment may go down as well as up. Past performance is not an indicator of future performance. Investing in start-ups and early-stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution. It should be done only as part of a diversified portfolio. These investments are targeted exclusively at investors who understand the risks of investing in early-stage businesses and can make their own investment decisions. Any pitches for investment are not offers to the public. The tax treatment of these investments depends on the individual circumstances of each investor and may be subject to change. In addition, the availability of any tax reliefs depends on the investee companies maintaining their qualifying status. Investments made in investee companies via alternative investment funds are not covered by the Financial Services Compensation Scheme (FSCS). For more details, please contact us or click here to refer to their website.
Nova Growth Capital Limited is an Appointed Representative of Sapphire Capital Partners LLP, which is authorised and regulated by the Financial Conduct Authority (FRN 565716).
About Alistair Marsden, Chief Marketing Officer, Nova Growth Capital
Alistair is both a founder and C-level sales and marketing professional with over 15 years senior leadership and board experience of starting and growing industry leading sales brands. He is responsible for oversight of the Nova Group’s commercial efforts as well as delivering the Fund Acquisition strategy.
Nova Growth Capital Limited is registered as a private limited company in England and Wales, registered number 11591402. Nova Growth Capital Limited is an Appointed Representative of Sapphire Capital Partners LLP, a firm authorised and regulated by the Financial Conduct Authority (FRN 565716)