Investing in startups through the EIS and SEIS Schemes in the UK is a high-risk activity. Because of this investment firms, such as RLC Ventures, will elect for a diversified portfolio as the returns of the individual companies may vary. Some companies may do well, while others may go to completely 0.
However, because EIS investors can take advantage of loss relief, the impact of any losses made on individual companies can sometimes be reduced. Even if an investor holds a portfolio of EIS or SEIS companies that, overall, has delivered a positive return, they can still claim loss relief on the businesses that fail.
Loss Relief is a process whereby an investor who makes a loss through the EIS or SEIS investments can set their losses against their capital gains tax (CGT) bill, or their income tax for that year, or the year prior.
To qualify for loss relief the value of an investment when it is sold has to have fallen below what’s called the effective cost. The effective cost is the amount invested minus whatever was previously claimed in income tax relief.
For losses offset against income tax, the net effect is to limit the investment exposure to as much as 38.5p per £1 for EIS, depending on the investor's marginal rate of income tax and if the shares become totally worthless. For SEIS, provided the same circumstances, the net effect is to limit the investment exposure to as much as 27.5p per £1 or where Reinvestment Relief is claimed, 13.5p per £1. Alternatively the losses can be relieved against capital gains at the prevailing rate of 20% for higher rate taxpayers (28% for UK residential property).