Carry back with SEIS or EIS?

Earlier this month I received a call from my IFA to arrange an appointment to meet during February. Like so many others in my position, it's the expected call ahead of the end of the tax year where we meet to review objectives and tasks for the year ahead. For many, it also leads to a reminder to make sure we’ve considered maximising our annual ISA allowance, review pension allocations, and for those that are familiar and regular investors in EIS and SEIS funds, to review how much tax relief could be claimed against income tax or any CGT liability. At this point, I feel compelled to point out, especially as he’s probably reading this, that my IFA contacts me throughout the year and doesn’t leave such topics to the last few weeks leading up to April 5th. But for others this is not necessarily the case.

At Symvan, and at all other fund managers offering tax-efficient investment funds, the weeks leading up to the beginning of April are the busiest for fundraising. It is inevitable that the majority of funds are raised during this period. I wrote about this in one of my previous articles a couple of years ago - Avoiding the Q1 Rush. However, of subscriptions received during this period, a material proportion are made with the explicit intention of utilising “carry back”.

What is carry back?

Income Tax relief is usually given to investors in the year in which the investment is made. However it is possible to carry back an SEIS or EIS subscription to the preceding tax year, providing the limit for relief was not exceeded in that earlier year.

The issue

You’d be forgiven for thinking that is good news for us. Well, in part, of course it is. We’re able to plan ahead the timing of investments having greater visibility and expectation of fund inflows. Yet this only applies to our EIS Fund. In fact, this year, we are accepting subscriptions that need to be invested into companies prior to 5th April only in our EIS Fund. If you need to utilise carry back prior to 5th April with SEIS we won’t accept your subscription.

Why?

Appropriate SEIS investment opportunities do not manifest themselves at the same time. Symvan’s SEIS investment strategy is grounded on a review and due diligence process that is highly selective. In practice this typically means that once we are aware of a prospective and realistic investment opportunity, a few months can pass before we actually invest. We will purposefully not rush through a due diligence process to completion, preferring to have a relatively large number of open opportunities to assess, with much of the initial review weighted towards allowing the investment team and the founders to get to know each other (as well as the business, of course) and build the start of what may be a long-term relationship. The result is that SEIS investments are made throughout the year as and when the investment process completes.

This is how we maintain quality in our portfolio and how we believe we will maximise the number of successful exits. Of the companies we have invested in via our SEIS funds, only one has failed to date.

Suppose you subscribed £10,000 to our SEIS fund and requested that the entire subscription be invested prior to 5th April so that you could claim income tax relief against your 16/17 income tax liability. Whilst you may achieve your objective of benefitting from an attractive level of tax relief, your investment would not benefit from diversification. Not benefitting from diversification will materially affect the potential return of your SEIS portfolio, especially as there's a recognised high probability that the majority will not succeed over the long term.

Carry back can still be very useful

In conclusion, if used properly, carry back can be a useful feature within the EIS rules. If you haven’t been able to plan ahead for your annual SEIS and EIS subscriptions and have income tax liability for last year on which you haven’t claimed against for carry back, you would be better off putting that to work within an EIS fund which can provide greater diversification in short order. And if you plan ahead, and don’t have un-utilised tax liabilities then splitting subscriptions across both SEIS and EIS funds can be highly effective.

INVESTMENT RISKS

An investment in the Symvan Technology SEIS Fund 3 or the Symvan Technology EIS Fund (the "Fund") is subject to a number of risks. Any investment in the Fund should be regarded as being medium to long term and illiquid in nature. All prospective Investors should be aware that as the Fund will invest in unquoted companies, the value of Shares in the Companies can fluctuate. In addition, there is no guarantee that the valuation of Shares in the Companies will fully reflect their underlying net asset value, or that Investors will be able to buy and sell at that valuation or at all. It may be difficult to obtain information regarding how much an investment is worth or how risky it is at any given time and the Manager may experience difficulty in realising the investments (for value or at all). The investments described in this communication will not be suitable for all investors. All potential Investors are accordingly advised to consult an investment adviser authorised under FSMA, and an appropriately qualified taxation adviser, prior to making an investment. Before making any investment decision, prospective Investors should consider carefully the risks attached to an investment in the Fund together with all other information contained in the Memorandum, including in particular, and not limited to, the risk factors described therein. Additional risks and uncertainties not presently known to the Manager or those that the Manager currently considers to be immaterial, may also have an adverse effect on the business or affairs of the Portfolio Companies. Investors should consider carefully whether an investment in the Fund is suitable for them in the light of the information in the Memorandum and their personal circumstances.