September 26, 2023
Recently, we’ve seen some interest among our clients in investing in start-ups. It’s an exciting, potentially lucrative, but also risky investment area, so if you’re considering it, read on for our thoughts.
Defining a start-up can be challenging in itself. It could be a business creating a new product or service, or a company aiming to solve a problem where the solution is not obvious and success is not guaranteed. Typically, to be considered a start-up, the company will be in the early stages of growth, with potential for rapid growth, an innovative approach, in receipt of external funding, and with the growth potential mirrored by vulnerability to failure.
Although the potential for rapid, exponential growth might, at first glance, seem to be the main reason for investing in start-ups, for many seasoned investors, it’s far from being the only attraction.
In fact, due to the high level of risk involved, it’s often fairly far down the list.
Many investors choose start-ups because they want to support businesses with the potential to bring some good into the world – whether through a product or service that directly helps to improve people’s lives, or benefits the environment, through job creation, or because of the company’s CSR activities.
You might want to invest in a specific start-up because it is founded on an idea or set of values that you believe in.
Equally, investing in start-ups may offer the opportunity to actually become an integral part of the team, enabling you to offer the benefit of your expertise, mentorship and strategic advice, as well as your cash, whilst working with ambitious entrepreneurs.
Another important benefit of start-up investment is the potential access to tax relief.
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are two of a number of UK government initiatives designed to encourage innovation.
Under the SEIS and EIS schemes, private investors get a significant tax break as a reward for investing in early-stage, ‘high-risk’ companies.
For SEIS, investors can claim up to 50% Income Tax relief. For example, if you make an investment of £100,000 that qualifies for SEIS, you can claim an Income Tax reduction of £50,000.
Other incentives to invest include SEIS loss relief if you sell your SEIS shares at a loss, no Capital Gains Tax (CGT) on any gains from the investment and no Inheritance Tax on SEIS shares as long as they’re held for at least 2 years.
For EIS, investors can claim up to 30% Income Tax relief. For example, if you make an investment of £100,000 that qualifies for EIS, you can claim an Income Tax reduction of £30,000
Similar incentives exist with EIS to SEIS, including Inheritance Tax relief and no CGT (as long as you hold the shares for at least 3 years).
The tax reliefs available from start-up investments might look tempting, particularly if you’re thinking about how diversifying your portfolio might mitigate an inheritance tax burden.
However, as we’ve mentioned., there are some significant risks to be aware of. That’s just one of the reasons to consult an independent financial adviser before investing.
Ask yourself WHY you want to invest, and be honest with the answer. Is your main motivation to see a financial return on your investment, or is it more than that?
When you’ve worked out why you want to invest, think about WHAT you want to invest in. Do you want to support companies that are making a positive impact on the planet or their communities? Or maybe you’d like to support the development of new technologies.
Being clear on your reasons for investing will allow you narrow down the list of potential startups to invest in:
Although there are plenty of self-service, online platforms out there which enable anyone to invest in start-ups (e.g. through crowd-funding schemes), these are really only suitable for experienced investors who understand all the risks.
For everyone else, your IFA will make sure you can maximise the tax reliefs available to you, and you’ll have access to professional managers who will do the research and due diligence on these companies on your behalf.
At Talis IFA, we’ve spent over 30 years advising our clients about all aspects of their personal and business finances, and we specialise in giving straight-talking advice that helps our clients to make the most of the available opportunities to reduce their tax burden.
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