Why the Wealthy are Investing in Start-Ups (Hint: It’s All About Tax Benefits)

High-net-worth individuals and seasoned investors are increasingly turning their attention to start-ups—not just for their potential growth, but as a smart way to maximize tax efficiency. Opportunities like the Seed Enterprise Investment Scheme (SEIS) are proving particularly attractive, offering generous tax breaks on capital gains, income tax, and more. With the government increasing its focus on encouraging investment in British businesses, these schemes have become more appealing than ever.

If you’ve been on the fence about investing in early-stage companies, this blog breaks down why these schemes are gaining traction, the risks involved, and what makes them a compelling addition to your portfolio when managed strategically.

Why Investment in Start-Ups is Surging

The recent uptick in interest among high-net-worth individuals isn’t just coincidental. According to data from Wealth Club, investment in SEIS skyrocketed by 250% between July and mid-September compared to the previous year. Investors are racing to take advantage of tax-efficient schemes ahead of an anticipated increase in capital gains tax (CGT) in the upcoming budget.

Adding to the momentum, the government extended SEIS incentives by ten years, now lasting until April 2035. This move underscores the government’s commitment to fueling innovation, creating jobs, and strengthening the UK’s economic ecosystem. But what exactly is fueling this investor frenzy? It all comes down to the numerous financial benefits tied to these schemes.

Key Benefits of SEIS

SEIS is specifically designed to balance the higher risks of start-up investing with substantial tax incentives. Some highlights include:

• 50% Income Tax Relief: Investors receive income tax relief equivalent to 50% of the amount they invest, up to a yearly limit of £200,000.

• Capital Gains Tax (CGT) Reduction: By reinvesting gains from the sale of another asset into an SEIS-qualified company, you can reduce your CGT liability by 50%.

• Tax-Free Gains: Any profits from the sale of SEIS shares are exempt from CGT after holding the investment for three years.

• Risk Buffer: If things don’t go as planned and the company fails, you can claim loss relief to offset some of your investment losses against income tax.

For example, a higher-rate taxpayer who makes a £100,000 capital gain from selling a property could reduce their CGT bill from £24,000 to just £12,000 by reinvesting those gains into an SEIS-qualified fund. Add income tax relief of £50,000, and a £100,000 SEIS investment would effectively cost just £38,000—a compelling proposition for savvy investors.

Enterprise Investment Scheme (EIS): Another Option

Unlike SEIS, which focuses on early-stage companies with assets under £350,000, the Enterprise Investment Scheme (EIS) supports larger businesses with up to £15 million in assets and no more than 250 employees. Though it lacks the 50% CGT relief offered by SEIS, EIS has its own set of enticing benefits:

• Up to 30% income tax relief for investors.

• CGT deferral—pay your CGT when you sell the EIS shares, rather than immediately.

• Tax-free gains on EIS shares held for a minimum of three years.

EIS is ideal for investors who want to diversify into slightly more established companies while still enjoying meaningful tax incentives. You can invest up to £1 million annually in EIS, or up to £2 million if investing in “knowledge-intensive” companies.

Why Wealthy Investors are Rushing Ahead of Tax Changes

Talk of potential capital tax reforms has created a sense of urgency among high-net-worth individuals. With an expected CGT overhaul on the horizon, SEIS and EIS schemes have become increasingly valuable tools for reducing tax liability. These programs offer a way to preserve wealth and diversify portfolios while supporting the next wave of UK innovation.

Nicholas Hyett of Wealth Club underscores this sentiment, stating, “Capital gains tax, inheritance tax, and pensions are all candidates for reform in the budget, so it’s no wonder wealthy investors are taking advantage of schemes that not only provide tax relief upfront but have the potential to shelter future gains from tax too.”

Understanding the Risks

While the tax incentives make SEIS and EIS inviting, they are not without risk. Start-ups inherently carry higher failure rates—some estimates suggest that nearly half of start-ups fail within five years. Additionally, these are illiquid investments; you may have to wait years for an exit opportunity, and even then, there’s no guarantee of success.

Other considerations include:

• Minimum Holding Periods: To retain tax relief, you must hold SEIS or EIS shares for at least three years.

• Higher Fees: These schemes typically involve higher charges, both from fund managers and advisers.

• Specialist Nature: SEIS and EIS investments should only form a small part of a diversified portfolio.

Jason Hollands of Evelyn Partners highlights, “These are not suitable for risk-averse investors. You must be prepared to remain invested long-term and accept that any returns depend on finding willing buyers for your shares.”

Venture Capital Trusts (VCTs): Another Path to Tax-Efficient Investing

Venture Capital Trusts (VCTs) provide a third option for tax-efficient investments. Unlike SEIS and EIS, VCTs operate as funds, spreading investment across multiple companies to help mitigate risk. Key benefits of VCTs include:

• 30% income tax relief on investments up to £200,000 annually.

• Tax-free dividends.

• CGT-free gains.

Because VCTs focus on more mature businesses and operate within a fund structure, they may be a better fit for investors seeking slightly lower-risk options, albeit with less lucrative tax incentives.

Success Stories

Despite the risks, many SEIS-backed start-ups have gone on to achieve significant success. Some notable examples include:

• Swytch Bike: Innovators of a kit that converts traditional bicycles into electric bikes.

• Olly’s: A successful snack company.

• Hunter & Gather: A food supplement brand with a growing customer base.

Investors who aligned with these companies early on enjoyed both the tax benefits and the satisfaction of backing groundbreaking businesses.

Final Thoughts

For high-net-worth individuals and financial advisors managing their clients’ portfolios, tax-efficient investment schemes such as SEIS, EIS, and VCTs offer a unique combination of tax savings and potential high returns. While they carry higher risks, those who carefully select their investments stand to benefit profoundly—both financially and by contributing to the growth of early-stage UK businesses.

However, these schemes are not for everyone. They require a tolerance for risk, a long-term outlook, and the ability to withstand periods of illiquidity. Diversification and professional advice are critical to making the most of these opportunities.

If you’re exploring how to best leverage SEIS or EIS in your financial strategy, consult an expert financial advisor to understand whether these schemes align with your goals. As the tax landscape shifts, investing in innovative businesses might just be the strategy you need to stay ahead.