Did you know SEIS flows have surged 188% since the 4 July 2024 general election? The Seed Enterprise Investment Scheme offers generous tax reliefs when investing in qualifying early-stage companies in the UK. What explains this rise in SEIS inflows, and what could the implications be for your own portfolio?
Below, our investment team at Bure Valley Group offers some reflections. We hope these insights are helpful. If you’d like to explore our pre-vetted SEIS opportunities in our exclusive investor network, please get in touch.
Why SEIS?
The Seed Enterprise Investment Scheme (SEIS) has long held appeal to early-stage investors due to the tax benefits on offer.
An investor can commit up to £200,000 per year to SEIS-qualifying investments. This is double the pre-April 2023 annual limit. When the time comes to file their Self Assessment tax return, the investors can claim back up to 50% of the value of their SEIS investments for that tax year.
For instance, an investor who committed £100,000 to SEIS-qualifying investments in 2024-25 could claim back £50,000 from their tax bill. They could also benefit from capital gains tax (CGT) relief when the time comes to sell their shares.
Often, investors must pay CGT on the profits from chargeable “asset disposals” (e.g. selling appreciated shares in a general investment account). However, SEIS allows an investor to get up to 50% in CGT relief if these gains are reinvested into SEIS-qualifying shares.
This likely explains much of the surging interest in SEIS following the general election result in July 2024. Many investors were worried that Labour’s rise to power would lead to higher taxes on investments, such as a rise in CGT.
These fears were not entirely unfounded. On 30 October 2024, Chancellor Reeves delivered her Autumn Budget, confirming specific CGT increases. The main rate would immediately rise to 18% for basic rate taxpayers and to 24% for higher rate taxpayers.
Tax-efficient investing
Tax-efficient investing was already becoming more challenging before the Autumn Budget in 2024. The Annual Exempt Amount (AEA) for tax-free capital gains stood at £12,300 in 2022. This reduced to £6,000 the following year and then down to £3,000 in 2024-25.
Also, factoring in the rise in the main rate of CGT for basic and higher rate taxpayers in October 2024, investors understandably feel more pressure on their portfolios. CGT-free options remain through vehicles like ISAs and pensions. However, these also come with various limitations.
ISA contributions are capped at £20,000 per year, and pensions face a maximum annual allowance of £60,000 (assuming no “carry forward”). By contrast, venture capital (VC) schemes like EIS and SEIS can offer additional options for tax-efficient investing.
For instance, SEIS shares are free from CGT if held for at least three years. This is provided you claimed income tax relief on them and the companies still qualify for the scheme.
Looking ahead in 2025, there is still speculation about further tax rises. At the time of writing, gilt yields and debt interest are rising, squeezing the Chancellor’s “fiscal headroom” and casting doubt over government borrowing targets.
Market forces may force the Chancellor’s hand despite her assurances that no further tax rises are planned. The outlook for UK growth is not optimistic after flatlining at the end of 2024. This will also add pressure to raise taxes and/or borrowing.
Within such an environment, investors have good cause to explore their tax-saving options as early as possible. SEIS, EIS and other VC schemes could offer a way forward.
Is SEIS right for me?
SEIS is not appropriate for all investors. Investing in early-stage companies is inherently risky. Failure rates are higher amongst startups compared to profitable and established firms. The potential returns can be significant, but investors should make sure they are aware of the risks and comfortable before committing capital.
Assuming SEIS is suitable, the available tax reliefs could amplify your potential returns. For example, suppose you make a £100,000 investment in SEIS-qualifying shares in 2024-25. The net cost is £50,000 after accounting for the 50% income tax relief.
You would break even on realisation if the investment value fell by 50%. Without any growth, the effective gain would be 50% after tax relief. With £12,000 capital gains reinvestment relief also available, the effective gain in the latter case would rise to £62,000 – i.e. a 62% effective gain, despite no investment growth.
Of course, the potential returns from SEIS could be even higher if your investment does grow. Conversely, loss relief can help cushion the blow if the shares fail. For instance, a £100,000 initial investment would provide £22,500 loss relief at 45% of at-risk capital.
Invitation
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