Everyone knows what’s meant by a low risk investment.  It’s one where there’s minimal risk of losing any part of your stake.  You want safe? – government bonds, National Savings, bank and building society deposits up to £82K.  You won’t lose your initial stake, but in the current climate you will most certainly lose value.   With the likes of Halifax paying 0.11% on deposits over £25K, and inflation running at around 3%, “safe” has taken on a new meaning – you can sit back and relax as your savings “safely” whittle away to nought.

Probably the last thing anyone would categorise as “safe” is investment in early-stage start-up business.  You’re almost guaranteed to lose the lot.

Or are you?

For the “right” investor the extraordinary tax breaks available this tax year ensure that whatever you lose on your investment under the Seed Enterprise Investment Scheme [SEIS] will be more than compensated by the tax savings it offers.

It’s important to understand what’s meant by “right”.  First, it’s a taxpayer who’s made a capital gain this year on which tax will be payable. Second, that taxpayer has to have a sufficient income tax liability this year to cover the upfront tax relief SEIS offers.  Third, in the event the investment does what you expect – fail – in the year of failure the taxpayer should be exposed to a sufficient level of income tax at the maximum rate to have it mitigated by the availability of loss relief.

An example:  Joe has made a capital gain on the sale of a second home of, say, £70K.  Because he’s a higher rate tax payer, the CGT bill comes to £16.8K.  He will have earned £90Kin the year, on which he’ll be suffering £26K of income tax.  Because SEIS investments qualify for a 50% income tax relief, he invests £52K in a SEIS business – precisely to ensure he wipes out his income tax liability .  His tax bill on £52K of his gain vanishes, as does his income tax bill.  So his £52K investment will actually cost £11.4K.

Joe’s anticipating a significant uplift in his income profile over the next couple of years, such that he’ll be exposed to something over £50K of tax at the highest rate of 45%. When the investment he’s made does what we all expect, and becomes worthless, he gets income tax relief on his loss.  For income tax purposes his loss is the initial £52K less the income tax relief he received at the time of £26K – a loss of £26K.  He gets tax relief at 45% on that loss, equals £11.7K.

So a high risk investment that cost £11.4K goes sour – leaving him £300 better off.

And of course, there’s always the possibility, however remote, that his investment doesn’t do what we expect, and becomes the next Facebook.

Rather changes the concept of what constitutes a low risk investment.

But this only works for investments made this side of 5th April – so time is running out ……….