SEIS versus ISAs

By October 6, 2021SEIS Investments

Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice. 

Everybody knows that the ISA (individual savings account) is one of the most tax-efficient ways for British people to invest. Yet SEIS – the Seed Enterprise Investment Scheme – is increasingly recognised as a great alternative for those looking for potentially higher returns (and who have higher risk tolerance). In this article, our investment team here at Bure Valley Groups examines the pros and cons of each option – to help you determine how they might fit in your portfolio.

We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:

+44 160 334 0827

 [email protected]

 

ISAs & SEIS: a brief overview

The UK tax year (April-April) is important when weighing the pros and cons of both ISAs and SEIS. In 2021-22, you can put up to £20,000 into your ISA(s) each tax year; whilst for SEIS qualifying investments, you can commit up to £100,000. The former allows you to generate capital gains, interest and dividends free from tax. This gives you the opportunity to build a sizeable, tax-free ISA portfolio if you maximise your allowance each year (e.g. £200,000 over ten years). However, for those with large sums to invest, this £20,000 annual limit is likely to be very restrictive. The £100,000 limit offered by SEIS, therefore, could be a great option.

 

SEIS tax incentives

Tax breaks offered by SEIS are arguably more attractive than those offered by ISAs. This is perhaps justifiable, since the investment risk involved is typically higher compared to many stock market and bond opportunities. Whilst an ISA offers you tax-free returns on interest, capital gains and dividends, the capital will still be subject to inheritance tax (IHT) upon death; since it is regarded as part of your estate. However, SEIS shares are exempt provided you have held them for at least two years. Given that you could invest up to £100,000 in SEIS-qualifying investments, this can make SEIS not only useful for wealth generation, but also estate planning.

The other important aspect of SEIS is that it offers investors loss relief if their investment fails. With stocks and shares in your ISA, however, no such loss mitigation mechanism exists. SEIS loss relief allows you to offset any loss (on the disposal of SEIS shares) against your income tax or capital gains tax (CGT) liability. If you are an additional rate taxpayer, for instance, then you could claim back 45% of the loss you incurred. This loss relief is also supplemented by another useful aspect of SEIS – income tax relief. This allows you to claim tax relief of 50% on the cost of the shares; offset against the individual’s Income Tax liability. So, if you invested £100,000 in some SEIS-qualifying companies, this would save £50,000. If these investments later failed, by unfortunate chance, then you could get up to 45% loss relief on this amount (£22,500). 

Finally, SEIS has another advantage; the ability to “carry back” and act as though you made an SEIS investment in the previous tax year. For instance, assuming you made no prior investment in SEIS, you could invest £200,000 (normally the limit each tax year is £100,000) and potentially gain 50% tax relief on the investments; i.e. £100,000.

 

Investment opportunities

With a Stocks & Shares ISA, you likely have a range of funds that you can invest in. However, many providers limit you to their own funds (e.g. Vanguard, at the time of writing) and you may also struggle to invest in a range of assets, companies or markets that you may be interested in. SEIS, however, widens the investment landscape – particularly regarding UK startups, where a significant level of growth potential can be present. These can include very niche fields such as fintech, e-commerce, health knowledge-intensive businesses and B2B software. In other words, if you are looking for a tax-efficient investment vehicle which can also significantly diversify your holdings, then SEIS can be a great option to consider.

 

Restrictions to mind

One benefit of ISAs is that there are, arguably, far fewer restrictions placed upon investors who wish to utilise them. The main conditions, for instance, include being a UK resident and being 18 years or older. With SEIS, however, you need to bear in mind the following:

  • You cannot be “connected” with the qualifying SEIS company (e.g. an employee).
  • You cannot acquire more than 30% ownership of the company or any subsidiaries.
  • You can invest a maximum of £100,000 into a single SEIS company, each tax year.
  • You must not have loaned money to the company in question.
  • The investment cannot be made for the main purpose of avoiding tax. You must invest only for “pure commercial reasons”.
  • There must be no pre-arranged exit.

 

Invitation

Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:

+44 160 334 0827

 [email protected]