Dominic Keen, founder of the British Robotics Funds, describes how ‘carry-back’ entitlements can be used to offset clients’ tax liabilities, while introducing a mixed-basket of some of the most promising robotics and AI business into their portfolio
The Seed Enterprise Investment Scheme (SEIS) has been described by Mark Brownridge, Director-General of the EIS Association, as ‘one of the most tax advantageous schemes in the world’ on account of the five highlyattractive tax benefits that have been wrapped into a single scheme.
A normal higher-rate taxpayer can have almost 70% of the amount of an SEIS-qualifying investment rebated by HM Revenue & Customs (HMRC) and, if they have taxable capital gains to offset, the risk-cover increases towards 85%.
Once this very high level of tax shielding is combined with the upside potential of investing in a broad mix of promising companies, it should be seen as a good fit for any longer-term investment portfolio geared for growth.
Using a fund structure, the individual investee companies are selected on the basis of having a diversified set of target markets, thereby reducing the specific risks associated with investing in any single early-stage company. Over-and-above the incentives of SEIS, another important feature of the scheme is the ability to ‘carry-back.’ This represents an extra benefit for planning, because any investment can be used to offset income tax owing, or paid in the previous tax year.
With this in mind, the first British Robotics Seed Fund was raised in the 2016/17 year with the objective of delivering a three-fold return on funds invested over the lifecycle of the fund. A second fund was raised in 2017/18. These funds have gained a significant profile amongst the adviser community and, to date, investments have been made in about a dozen fast-growing British robotics and artificial intelligence businesses. A sidecar fund is currently open, giving investors access to the product today.
Why invest in robotics and artificial intelligence companies?
Capable, self-operating machines are increasingly becoming available to reduce the time and money spent by organisations on repetitive tasks. The promise of robotisation within many areas of life suggests that robots and AI are catalysing a new industrial revolution that will spur on the global economy over the forthcoming decade. Consequently, robotics represents one of today’s most exciting investment themes for a growth-focussed investor.
Nonetheless, it still remains notoriously difficult for clients to get exposure to this attractive area because much of the current development activity, up to now, has been happening within universities or the subsidiaries of large multi-national corporations.
However, as the cost of hardware falls and the pool of national expertise grows, we are starting to see the green shoots of a vibrant robotics and AI start-up scene in the UK. In fact, because of companies like Deep Mind, it is one area where Britain is recognised to have a strong global pedigree. Attractive opportunities are appearing for homegrown businesses to exploit worldwide markets, delivering potentially spectacular investor returns in the process.
Introducing the new British Robotics Scale-Up Fund
Whilst an SEIS fund can represent an ideal home for a higher-rate tax-payer that is focused on portfolio growth, it is also the case that some clients will still wish to access to the upside potential of the robotics and AI sector, but will have more of an eye to capital preservation.
They will therefore want to avoid the high company-specific risks of investing in early-stage businesses. To address this need, the British Robotics Scale-Up Fund will be launched this autumn. Investors will have a wider range of companies in their fund portfolio, each of which will have already taken their product to market and will have a clear route to profitable growth. Whilst the tax advantages of this fund are less significant (only attracting EIS relief, rather than SEIS), it has a shorter lifecycle to disbursement and a lower-risk investment profile. The ‘carry-back’ benefit, mentioned above, remains.
In cases where a client has reached their thresholds on pension contributions and has used up their ISA allowance, investment in a vehicle like the British Robotics Scale-Up fund may represent an attractive additional component in a comprehensive, IHT-friendly retirement funding strategy.
‘Own the robots’
In summary, planners and advisers should consider ensuring that their clients’ portfolios incorporate the important investment theme of robotics and AI, as part of a broader strategy for long-term growth. The British Robotics funds are in place to offer solutions which meet the needs of investors, whilst taking full advantage of tax-leverage and adopting a balanced approach to portfolio risk.
Capable, self-operating machines are increasingly becoming available to reduce the time and money spent by organisations on repetitive tasks