You want to invest in a Seed Enterprise Investment Scheme (SEIS) because of the generous tax breaks, but finding the right start-up is a little like walking through a minefield.
SEIS is government-backed investment scheme that lets investors pump up to £100,000 in cash into a new company in a tax year.
In return, the investor receives:
- An equity stake in the company
- A 50% income tax reduction worth up to £50,000 whatever tax rate paid
- A 50% capital gains tax exemption on assets sold in the tax year to directly fund the SEIS
- Tax free growth on their SEIS equity stake
- Loss relief against other income if the SEIS company fails
That all sounds good for the investor, but picking the right investment is not quite so easy.
Qualifying for tax breaks
First, discount any SEIS company that does not have written pre-approval of qualification for the scheme from HM Revenue & Customs (HMRC).
The tax breaks are only valid on a SEIS-approved company that remains within the scheme for 36 months.
To join SEIS, the company directors have to show their venture meets a host of qualifying rules, and the pre-approval certificate proves HMRC has made some basic checks to ensure these rules are met.
Due diligence checks
Other due diligence checks to bear in mind include:
- Meeting the management team to find out whether they have the skills and experience to take the project to fruition – if not this could mean spending more time and money involved in the company by the investors
- Many SEIS directors are ideas people with a lack of business experience – and if no one else is going to control how your money is spent, you need to put some checks and balances in place.This can and should include board representation for early notice of important decisions.
- Poring over the figures and assessing the assumptions that underpin the figures in the business plan
- Planning an exit route from the start to make sure you have a clear roadmap over the three year life of the SEIS
One way to reduce the risk of a direct SEIS investment is spreading your cash across several projects in a managed SEIS fund. Several are available and the fund managers will have already carried out due diligence.
The downside is less risk is likely to equal less return as the fund managers are likely to levy set-up and annual running cost charges for the privilege of looking after your money.
