Investing in start-up businesses carries the allure of extraordinary returns—sometimes 100x or more. But finding a “unicorn” (a privately-held company valued at over $1 billion) is as rare as the name suggests. With a start-up failure rate often quoted as exceeding 60% within the first five years, achieving unicorn-level success is far from guaranteed.
In the UK alone, more than 800,000 new companies are incorporated annually. Yet, only 41 active UK-headquartered businesses have reached unicorn status. The odds may be slim, but the rewards can be compelling.
Despite the risks, venture capital has historically outperformed traditional asset classes. Since 2014, the average return on total capital for venture capital funds has been 2.52x, representing an internal rate of return (IRR) of 11% over 10 years—significantly higher than the performance of the FTSE All Share Index over the same period[1].
[1] BVCA – Venture Capital in the UK
(Author: Dominic Ball)
Tax Incentives for Private Investors
To encourage early-stage investment, the UK government offers attractive tax reliefs for individuals investing in qualifying businesses. Two key schemes are:
Seed Enterprise Investment Scheme (SEIS)
Designed for very early-stage companies, SEIS offers:
- 50% income tax relief on investments up to £200,000 per tax year.
- Capital Gains Tax (CGT) exemption on shares held for at least 3 years.
- CGT reinvestment relief
- Loss relief on failed investments.
Enterprise Investment Scheme (EIS)
Targeted at slightly more mature early-stage companies:
- 30% income tax relief on investments up to £1 million per tax year, or up to £2 million for knowledge-intensive companies.
- CGT exemption after 3 years.
- Deferral relief on reinvested gains.
- Loss relief in case of failure.
The Limitation: Personal Capital vs. Company Structures
For business owners or higher earners who typically extract minimal income from their companies, investing via SEIS or EIS can pose a challenge. Funding these investments personally often requires paying additional dividends, triggering personal tax charges before the reliefs are applied. This can erode the overall benefit.
Whilst SEIS and EIS can be exempt from CGT on gains, any proceeds from the disposal may be subject to inheritance tax (IHT) up to 40% - a real problem if you do catch a unicorn.
An Alternative: Investment via a Special Purpose Company
While companies cannot access SEIS or EIS reliefs, using a Special Purpose Investment Company—such as a Family Investment Company (FIC)—offers its own advantages:
Tax Efficiency
- The company can be funded with retained profits from a trading company, avoiding personal income tax.
- Dividends received by companies are usually not taxable.
- Profits can be retained and reinvested, compounding growth over time.
Estate & Succession Planning
- Shares in the company can be gifted to family members or held in trust.
- Offers flexibility for long-term inheritance tax (IHT) planning.
A Hybrid Approach
Many investors find that a blended strategy works best:
- Use personal funds to fully utilise available SEIS and EIS reliefs.
- Use a FIC to hold non-qualifying investments or make follow-on investments outside the scope of these schemes.
Final Thoughts
Investing in early-stage businesses offers both high risk and high reward. Whether you choose to invest personally for tax efficiency or via a corporate structure for long-term planning, the right approach depends on your overall financial objectives and succession strategy.
If you would like to begin a discussion, contact our experts today.