Seed Enterprise Investment Scheme (SEIS) – big profits from small ventures
The Seed Enterprise Investment Scheme (SEIS) – a government-backed, tax-efficient investment scheme – is a tempting proposition for investors
From acorns grow oak trees: that's the sales pitch from fans of the Seed Enterprise Investment Scheme (SEIS), though the scheme's offer of more generous tax incentives than any other similar investment initiative is also part of the appeal. And with other opportunities to shelter from rising taxes now diminishing, many experts think the SEIS is set to become more popular than ever in the current tax year, which began earlier this month. Introduced in 2012, the SEIS aims to help very small and very young companies raise money to fund their growth. These are businesses that may lack the trading record necessary to borrow money from the bank, or to raise capital from other sources. Without access to finance, their growth may be stunted, preventing them from fulfilling their potential.
We really are talking about acorns. Raising money through the SEIS is only an option for businesses that have been trading for less than three years, which have assets of no more than £350,000 and fewer than 25 employees. There are also several more technical qualifying rules that limit SEIS eligibility to start-ups and very early-stage businesses. Inevitably, many of these businesses fail, taking investors' money with them. A recent study from Warwick Business School put the three-year survival rate for start-ups in the UK at 47% – falling to just 10% after ten years. Even businesses that show some early success – those that might therefore catch investors' eyes – often don't progress. Just 7% of businesses making it to £1 million of turnover go on to surpass £3 million, the Warwick study found.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
SEIS can offer some extraordinary tax breaks
One example of a successful SEIS investment is Cognism, now regarded as one of Europe's leading data technology companies. The business raised SEIS funding in 2017, two years after its launch, with investors then able to exit when the business secured new backers in 2022; their returns were estimated to be worth around 40-times their initial stake. Only a handful of such winners can be rocket fuel for a SEIS portfolio, says Alex Davies, founder and CEO of investment platform Wealth Club. “The SEIS offers the chance to back very early-stage businesses with genuine high-growth potential, while recognising that most won't succeed,” Davies says. “The key is that you don't need many winners to generate significant returns.”
In part, that's because a few very large gains will compensate you for losses elsewhere. But the tax incentives offered on the SEIS – the government recognises that investors need some encouragement to risk their money – also provide plenty of insulation. Those tax breaks genuinely are quite something. You can invest up to £200,000 each tax year through the scheme, but you get 50% income-tax relief on this subscription, reducing its cost by half as long as you're earning enough to claim relief in full. In addition, you can claim capital-gains-tax reinvestment relief – if you've got taxable profits on other investments, you can reduce the bill by 50% by reinvesting these gains through the SEIS.
There's also support later on. Once you've held shares in a SEIS company for three years or more, any profits you make on the investment are free from capital-gains tax. Alternatively, if the business goes bust, you can claim loss relief, setting your losses against other taxable income you may have. SEIS investments also get preferential treatment on inheritance tax. The first £2.5 million worth of qualifying investments don't count towards the value of your estate for inheritance tax (IHT) purposes; on investments above this threshold, IHT is charged at only 20%, half the usual rate.
The combined effect of all these reliefs is significant. “SEIS tax reliefs turbocharge returns when things go well and cushion the impact when they don't,” explains Davies. “In today's high-tax environment, it's increasingly difficult for non-tax-advantaged investments to compete.” If you invest £100,000, say, in a portfolio of SEIS investments that returns 50%, your effective gain after income tax and capital-gains reinvestment relief will be 112%. But even if there's no growth and you only get your starting capital back, you would still be making a 62% gain.
Alternatively, the tax reliefs limit downside risk. If your £100,000 investment halves in value, you'll still be making a positive return of 12% after the income-and capital-gains tax breaks. Or, in the worst case scenario, where your investment ends up worthless, the actual loss on your initial £100,000 stake would only be £15,500.
Such perks look even more attractive given that the tax reliefs available on similar schemes are being reduced. The upfront income-tax relief on offer to investors in venture capital trusts (VCTs) – which also invest in early-stage businesses – fell from 30% to 20% on 6 April. At the same time, the tax burden that investors in these schemes are often looking to mitigate is increasing. Most notably, the IHT net will shortly be extended to include unused pension savings, while exemptions for business and agricultural assets are being eroded. Together with an ongoing freeze on the thresholds at which IHT becomes payable on estates, this has the potential to drive up bills for many families.
In fact, the SEIS is one of the few tax-efficient investment schemes to offer relief on IHT – along with its big brother, the Enterprise Investment Scheme (EIS). Cash and assets held within an individual savings account (ISA), for example, will count towards the value of your estate for IHT purposes. The same is true of VCTs. No wonder that the SEIS is attracting more interest, with investment in qualifying businesses already on an upward trend. “The SEIS is a key part of the UK's dynamic start-up environment, and recent changes with the reduction of tax relief for VCT investors make it even more attractive by comparison,” says Matt Cooper, co-CEO of the private market investment platform Crowdcube.
Pause and think about the risk
In the 2023-2024 tax year, the most recent period for which data is available, 2,290 companies raised £242 million through the SEIS, up more than 50% on the previous year, partly thanks to a tweak to the rules that enabled more companies to participate and to raise more money. Almost 10,150 investors put money into companies qualifying for the scheme, a 23% increase compared to the 2022-2023 tax year. The early indications are that the SEIS saw further growth in 2024-2025, with HM Revenue & Customs receiving 3,195 applications for “advanced assurance” – essentially requests from companies for guidance that they qualify for the SEIS scheme before they seek investment. That was 18% more than in the previous year.
Nevertheless, investing in the SEIS simply for tax reasons would not be sensible. Given the elevated risk profile of SEIS companies, this is an investment only suitable for wealthy and sophisticated investors who feel comfortable with the possibility of losing some or even all of their money. You will almost certainly have made good use of ISA and pension allowances before thinking about the SEIS; you may well have invested in VCTs and the EIS too. Also, remember that the scheme is most tax-efficient for investors who have other capital gains to roll over into it.
Still, the good news from an investment perspective, argues Joseph Zipfel, the chief investment officer of early-stage investment specialist SFC Capital, is that the SEIS has matured since its launch more than a decade ago. “The risk profile has changed materially,” he says. “While early-stage investing will always carry risk, the underlying quality, maturity and resilience of SEIS-backed companies has improved over the last ten years.”
The explanation, Zipfel believes, is that the UK's start-up ecosystem has improved markedly in terms of the amount of support available to entrepreneurs, with help on offer from universities, incubators, accelerators and government-backed organisations such as the British Business Bank and Innovate UK. Business founders are more sophisticated as a result – and the backing available has encouraged a broader range of people to launch their own enterprises.
Moreover, many SEIS-eligible businesses are now run by more experienced founders. “The SEIS has funded more than 2,000 companies every year for more than a decade; one of the most important consequences of this scale is the recent emergence of a second wave of entrepreneurs building their second or third venture,” Zipfel adds. “These founders bring hard-earned lessons from their first businesses, whether successful or not. They are typically more disciplined in capital allocation, clearer on go-to-market strategy, and faster at identifying what does not work.”
Add in the changes to the SEIS rules made in 2023, which saw slightly larger businesses become potentially eligible, and the overall picture is of a more resilient set of opportunities. “This evolution does not eliminate risk,” says Zipfel, “but it does mean that the starting point is much stronger and the overall risk-adjusted opportunity has improved materially.”
How to invest in the SEIS
There are two ways to take advantage of the investment opportunities and tax incentives that the SEIS offers. Your first option is to invest directly in a qualifying company that is currently raising money. The firm will need to have checked its SEIS eligibility with HMRC and should be able to tell you that it has received assurance that investments are likely to qualify.
The easiest way to find such opportunities is via a crowdfunding site – an online platform where early-stage companies appeal directly to retail investors. Platforms including Crowdcube, Crowd for Angels, Republic Europe (until recently known as Seedrs) and SyndicateRoom all feature SEIS-eligible businesses making pitches to investors.
The advantage of investing directly is that you have total control over which firms you decide to back. The downside is that it may be harder to spread your bets – you'll need to invest in multiple qualifying companies to avoid the danger of being exposed to a single high-risk business, or even a small handful. You'll also need to do your own due diligence.
Option two, therefore, tends to be more popular. Many investors opt for a SEIS fund – essentially a portfolio of ten to 25 or so qualifying companies chosen by a professional investment manager who specialises in investing in early-stage companies. Specialists in this area include Fuel Ventures, Guinness, Haatch and SFC. Wealth Club is one central point of access to a choice of SEIS funds.
With a fund, you get diversification and the benefit of the manager's expertise and experience. Funds may also have access to a wider range of opportunities, including attractive companies not on your radar. Investing in SEIS funds can also be a useful way of spreading risk, “although this needs to be balanced against the likelihood of higher returns from a direct individual investment if it goes well”, says Crowdcube's Matt Cooper.
There are downsides to the fund approach, too. Expect to pay much higher charges than on other types of collective investment funds, which will dilute your returns. You'll also be surrendering control of investment decisions and losing the direct relationship with individual firms, which many investors enjoy.
Finally, note that once you've made your investment, the business or fund will send you a form so that you can claim the various tax reliefs through your self-assessment tax return. This paperwork – known as the SEIS3 form – is critical; you won't be able to apply for relief from HMRC without it.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
