Think Differently About SEIS
If you are an adviser that has dismissed Seed EIS out of hand as being too risky, we hope that you will think again. There are some very powerful reasons why SEIS investments should be on your financial planning agenda.
Support when it is needed the most
Nova started investing in start-up companies in 2008. What we quickly learnt was that the success of young companies was massively improved if they had the right support and guidance from the very start, at the very time that they generally can’t afford it. That is why we put a flexible team of experts around every company we invest in to support their growth, which can include software and hardware engineers, marketing and finance specialists, designers, project managers, and others as needed.
As a result:
- Our 3 year failure rate is only 34% (28 out of 82 companies have failed within 3 years), Which is a very significant improvement compared with the industry average of around 90%
- The weighted year on year uplift of the portfolio from 2008 till April 2019 has been 36.5% pa
The future is in start-up businesses
What the pandemic has shown is that young businesses are nimble and responsive to market changes and opportunities. They are also creating new jobs. By and large, it is the very large companies, with high overheads that have been cutting back. It is so exciting to see the young companies that we invest in grow.
The importance of diversification with SEIS
There are two ways in which SEIS investments can add valuable diversification to an investment portfolio.
First of all there is the fact that investing in SEIS is very different from investing in other asset classes. It is generally uncorrelated with most other asset classes, and especially those that are impacted by the latest economic and market trends. This is because early stage SEIS companies are mainly focused on research and development, which are less impacted by what the wider markets are doing.
The most generous tax reliefs of all
Secondly, a diversified portfolio of young companies with great ideas also offers added value to a portfolio. It is universally accepted that some young companies will fail. But that is why the government offers such generous tax reliefs, to compensate for the fact that some are likely to fail. Investors benefit from 50% Income Tax Relief on all SEIS investments, and loss relief of up to 22.5% ( depending on your tax rate) on the SEIS companies that fail. This means that the money at risk can be only 27.5% of the investment, and a few successful companies in a portfolio can show very healthy overall returns.
And this is without the other tax benefits of CGT relief and IHT relief.
Let’s look at an example:
In this example, an investment of £10,000 is spread equally across a portfolio of 10 companies.
Net cost of investment after 50% income tax relief = £5,000
4 companies fail completely, so loss relief can be claimed on
Assuming the investor is a 45% tax payer, loss relief amounts to
2 companies survive to return the money invested
2 companies do quite well, and double their value
2 companies do well, and quadruple their value
Total return to the investor is £14,900, for a net investment of £5,000
We have written a summary of the new whitepaper by Dr Brian Moretta, Hardman & Co discussing asset allocation and diversification.
Here are the findings of our recent survey to UK Financial Advisers. Where we sought to find out the barriers preventing them from investing their clients into SEIS.