Investors do not like to think about losing money – but they need to plan for the risk even under the Seed Enterprise Investment Scheme (SEIS).
SEIS offers investors a wide range of tax breaks going into an investment – but importantly offers relief against losses if the deal goes wrong.
When designing SEIS to lure private investment cash to help entrepreneurs start small businesses, a lot of the thinking went into rewarding investors for entering the scheme.
However, dealing with losses if something goes wrong was also covered by the legal draughtsmen.
The target is striking gold with a return of investment of 2.5 times cash in, but the statistics show only three out of 10 businesses that open for trading in 2015 will still be there after the three-year life of a SEIS investment.
Although the countdown is on for the first SEIS successes to emerge next April, for every one, two or three others will have failed, writes Stuart Smith of specialist investment web site SEIS.co.uk.
Stuart also argues that loss relief is probably one of the most important reliefs for pragmatic SEIS investors who understand the odds of a start-up business succeeding are stacked against them.
Loss relief is not complicated to work out – but SEIS investors have to consider any income tax relief they may have received when calculating their sums.
For example, an investor buys a £100,000 equity stake in a SEIS company and receives £50,000 income tax relief against tax already paid.
After 36 months, the SEIS ends and that equity stake is worth just £60,000 as the business has failed to perform as planned.
The loss is not £40,000 (£100,000 investment less £60,000 share proceeds) but £10,000, calculated as £100,000 (investment) – £50,000 (income tax relief) – £40,000 (proceeds of share disposal).
That £10,000 is available to offset against other income.
“The fact is SEIS investors are likely to become very familiar with loss relief simply because of the failure rate of new businesses,” said Stuart Smith.
“I’m not advocating investors should go into a SEIS expecting failure, but government figures show a shocking closure rate for new businesses.”
Stuart suggests SEIS investors should consider both success and failure scenarios in their due diligence and run the numbers to see what their exposure is to making a loss from investing in a start-up company.
The SEIS Guide
To find out more in-depth information of how the SEIS works, you can Download the Seed Enterprise Investment Scheme Guide here