Years of low interest rates have left savers exploring what else they might do with their cash. For many, this will be the first time they have stepped outside the cosy, reassuring world of their ISA. The next steps could encompass direct lending through Peer-2-Peer debt platforms, but may well extend to equity investments. In this case, many first-time investors are likely to be surprised by the incentives available to make equity investments, particularly in early-stage, potential high-growth businesses.
Tax relief for investors
The UK Government offers relief from various forms of taxation to encourage investment in UK businesses. Reliefs available include capital gains tax and inheritance tax, but these are less likely to be at the forefront of the minds of first-time investors. Income tax, on the other hand, is paid by over 30m people in the UK every year. Opportunities to access income tax relief are therefore likely to hold more universal appeal.
Investing in certain businesses (typically smaller, privately-owned businesses) can offer relief from income tax. This relief is not contingent on any previous investment, nor does it only apply to investments or incomes over a certain level. Furthermore, online platforms like GrowthFunders make investing directly in a business more accessible than ever before.
Look out for investment opportunities that are marked EIS. The Enterprise Investment Scheme is an established HMRC scheme that offers a range of incentives that are valuable to first-time investors and seasoned professional investors alike. Investing in a business that is EIS accredited entitles an investor to reclaim 30% of their investment in income tax relief, provided they hold the investment for a minimum of 3 years. So, if they invest £500, they will be eligible to reclaim £150 in income tax relief.
The Seed Enterprise Investment Scheme (SEIS) is the EIS’s younger sibling. Businesses just starting out qualify for SEIS accreditation; investing in one of these entitles an investor to reclaim 50% of their investment in income tax relief, again provided they hold the investment for a minimum of 3 years. So, if they invest £500, they will be eligible to reclaim £250 in income tax relief.
This really is just the tip of the iceberg. EIS and SEIS investments offer a range of further tax incentives, including loss relief if an investment has decreased in value when it is sold. Other investment schemes offer other incentives. To find out more about tax efficient investing, grab your copy of our free downloadable guide.
Demystifying investment terminology
As with most industries, investing has its own language. This can be unsettling for first time investors, but the key terms are worth getting to grips with. Once you do, you’ll feel more confident Here are two to get you started:
A diverse portfolio of investments is an established ambition for investors. To achieve diversification, the portfolio should include investments that offer a good spread across different sectors, sizes of business, and locations. The rationale for this is that, if an investment is impacted negatively by one of these factors, it won’t affect all the investments in your portfolio. Or put another way, avoid having too many eggs in one basket. Whatever size your total portfolio, you should seek diversification if investing in individual businesses.
Online platforms have much lower minimum investment levels than more traditional investment routes; this assists first-time investors’ pursuit of diversification. Diversification can be achieved within a £1,000 investment portfolio, through making a series of seven or eight investments, each of between £100 and £200.
One undoubted virtue of cash savings is that your cash can (often, not always) be accessed instantly. If you face an unexpected bill, such as having to replace a domestic appliance, it is easy to draw upon savings that you might then seek to replenish at a later date. Making an investment in a business means that your cash will be much more difficult to extract. This phenomenon is known as liquidity; an asset that you can easily return to cash in your hand is a liquid asset; an asset that is more difficult to return to cash in your hand is an illiquid asset.
Investments in early-stage businesses are very illiquid. Whilst it is possible that another shareholder may be willing to purchase your shares when you wish to sell them, it is more likely that you will need to wait until the business is bought by another business or, rarer still, float on a stock exchange before the value of your investment can be returned to you in cash.
Look out for our Beginners guide to Tax Efficient Investing, including a further focus on terminology, which will appear on the GrowthFunders site very soon.
Low interest rates dictate that savings currently offer a poor return on investment. Although there will always be a place within anyone’s portfolio for instantly accessible cash, individuals need to consider complementary investments that offer greater growth potential. It is easier than ever before for first-time investors to invest in individual businesses and to access the tax incentives that accompany those. We are committed to offering these opportunities on our GrowthFunders platform. But in addition to offering investment opportunities, we’re equally committed to offering educational resources that provide investors with the confidence they need to begin to assemble an investment portfolio.