Founding partner Martin Sherwood outlines the likely performance of an SEIS portfolio
With the recent rule changes to the EIS, people have begun to re-focus on the SEIS. The increase in the risk profile of the EIS following the rule changes makes the SEIS relatively more attractive than it was before.
SEIS was completely unaffected by the rule changes, so it is surely worth taking another look at the considerable attractions of SEIS: 50% up-front Income Tax relief; Capital Gains Tax relief which is in fact better than that available with the EIS, consisting of a write-off of liabilities on half the value of the investment; loss relief, which when combined with income tax and CGT relief, can amount to as much as 86.5% of total cost; exemption from IHT after two years; but probably the most important being exemption from CGT on any gains made from your SEIS investment.
So, what is the likely performance of a SEIS portfolio?
In simple terms, there is likely to be a much wider spread of performance, i.e. higher highs and lower lows than a normal investment portfolio. Let us assume your portfolio is spread over 10 investments, for example, and say seven out of ten make money but three lose money, you get tax-free gains on the seven PLUS loss relief on the three losers. So there is no offset of relief between the separate investments, which in our view is extremely generous and makes the SEIS such an attractive proposition.
SEIS has only been going for about five years, so it is a little early to draw any definitive conclusions about portfolio performance. Leading syndicate The Startup Funding Club have made well over 100 investments over the last five years, but none have so far exited. Neither have any failed completely. But performance to date diverges widely – there are several investments which are showing spectacular performance based on the price at which they have most recently issued shares; and at the other end of the scale, there are a few which look likely to fail, but which are still alive.
Obviously, there is no guarantee that your hypothetical portfolio of ten investments will necessarily contain any outright winners, but there is a reasonable chance
For example, if one investment returns 30 x cost, even if the remaining 10 investments are complete write-offs, in gross terms you will still have made a return of 3 x cost on balance. But that return is much higher when you take into account the loss relief you are able to claim on the 9 write-offs (the actual total of loss relief will depend on your highest marginal rate of tax so will vary from one individual to another).
A couple of examples of spectacular investments made by The Startup Funding Club: Onfido and BioEpic. Onfido (www.onfido.com) , an identity verification software business which can provide instant identity checks based on photographic images, has become an international business in a short space of time and its most recent investment round valued the shares at 70 times the original share price. BioEpic (www.epichealth.io) provides glucose monitoring “but not as you know it” by way of an app on your smartphone, doing away with the need for needles and blood. This is a perfect example of a disruptive business which is completely changing the landscape for diabetes sufferers. The most recent investment in BioEpic values the business at 30 times the original share price.