The Seed Enterprise Investment Scheme (SEIS) gives a sound financial platform for start-up businesses looking for funding and a massive hedge against risk for investors.
But while every investor hopes they have struck gold by backing a new company that will hopefully deliver at least a return of 2.5 times investment, the fact is most fledging businesses fail.
According to government statistics, 400,000 new businesses opened for trading in 2012.
But the statistics also show 20% close again within 12 months – that wipes 80,000 businesses off the list to leave 320,000 at the end of year one.
By year three, another 50% have stopped trading, bringing the survival rate down to 160,000 of those original 400,000 companies.
Business failure rates
And the attrition does not stop there. Only a handful will still be around come the 1oth year of trading.
The crucial figure for SEIS investors is how many businesses survive their first 36 months, as the term of a SEIS investment lasts that long.
Although some investors will be reaping the benefits of pumping £100,000 into a SEIS company in year one, a large number will be looking at offsetting their losses.
Fortunately, SEIS investments help temper the risk.
An investor who pays in the maximum £100,000 seed capital can expect a tax refund of £50,000, providing they have paid more than £100,000 in income tax.
They can also take a 50% write-off on capital gains tax if they have sold other assets to raise the cash for SEIS.
Importantly, one of the overlooked advantages of SEIS is loss relief.
Calculating SEIS loss relief
The calculation is simple – subtract the proceeds of the sale of any SEIS shares from the original investment while accounting for the original income tax relief.
So, an investor who paid £100,000 for his shares received £50,000 income tax relief at the start of the SEIS and received £60,000 for his shares at the end of the SEIS.
£100,000 less £50,000 leaves £50,000. The share proceeds less remaining income tax relief is £60,000 – £50,000, so the loss relief is £10,000.
This £10,000 is available to offset against other income.
Crunching the numbers before committing cash to a SEIS is important – not only for working out the gain if everything runs smooth, but also looking at the downside cost if the investment turns sour.
Seed Enterprise Investment Scheme Guide
To find out more in-depth information of how the SEIS works and the rules, you can Download the Seed Enterprise Investment Scheme Guide here