The Seed Enterprise Investment Scheme (SEIS) has been recently described by Mark Brownridge, Director-General of the EIS Association as “one of the most tax advantageous schemes in the world” on account of the five highly attractive tax benefits that have been wrapped into a single scheme. A normal higher-rate tax payer can have almost 70% of the risk of an SEIS-qualifying investment underwritten by HMRC and, if they have taxable capital gains to offset, the risk cover increases towards 85%. Once this very high level of tax shielding is combined with the potentially unlimited upside of investing in ultra-high growth businesses, it should be seen as an extremely important component of any longer-term investment portfolio.
With this in mind, funds are being launched to give investors access to the UK’s most promising new businesses, mitigating the inherent risks of angel investing by leveraging the tax-efficiencies of the SEIS wrapper.
For example, the British Robotics Seed Fund (www.britbots.com/fund) has recently been established to exploit one of today’s most exciting growth themes, robotics. As technical advances in automation and artificial intelligence continue to leap forward, robotics represents one of today’s most exciting investment areas. The UK is already home to a great deal of expert talent in this field.
As evidence, the first commercial flights of Amazon’s parcel delivery drones anywhere in the world began in the England this December. There’s every chance that a number of the world-leading robotics businesses of the future are currently being created in this country. The British Robotics Seed fund looks to give investors access to some of these attractive companies which have the potential to deliver multiple-fold returns to their early-stage backers in the years ahead.
Over and above the many tax incentives of SEIS, another feature of the scheme, “carry back”, represents an extra benefit for tax planning. Funds, such as the British Robotics Seed Fund, that are now currently raising capital will deploy the money being raised into investee companies through the first six months of the 2017/18 tax year.
Investors in the fund, however, are permitted to “carry back” these investments for the purposes of the 2016/17 tax year. This means that their investment can be used to offset tax liabilities in the current period thereby allowing investors to be more precise in their tax mitigation activities as the tax year-end approaches.
Furthermore, SEIS funds like the British Robotics Seed Fund may use additional tactics to further reduce risk and improve returns. Robotic technology can be applied to wide range of sectors including logistics and warehousing; agriculture; construction & civil engineering; low-volume manufacturing; domestic; facilities management and security; and specialist medical equipment.
Consequently the fund actively looks to spread the investments it makes across a broad range of these sectors and to back a variety of business types so that it can balance the company-specific risk to the fund investors. The British Robotic Fund also provides operational support from a proven, experienced mentor to each robotics team that it backs. In many cases, this allows technically proficient roboticists to gain access to broader business skills and, thereby, to become more likely to deliver a substantial cash exit to investors in the fund.
An investment in a SEIS fund is increasingly being seen as an important component of any growth-orientated personal portfolio that’s being built for a longer-term (five-year plus) horizon. Thanks to various risk reductions arising from the SEIS tax-shielding and the other mitigation strategies, these funds have a much lower risk profile than most other forms of equity investing and certainly carry significantly less risk than more conventional investments in unquoted businesses.
Whilst the nature of the investment class means that investors’ capital will be tied up for a number of years, the tax-adjusted returns have the potential to be extremely large and, given the inheritance tax exemption under SEIS, an investment may well be as suitable for an alternative retirement planning strategy as it is for investors who wish to shield against large income tax liabilities in the current tax year.
The marriage of the attractive tax benefits of SEIS with ultra-fast growing investment areas such as robotics seems to have created an exciting new investment class that ought to provide new avenues for investment portfolio planners to consider.