Investors are turning elsewhere for above inflation returns in these days when savings accounts and retail investments offer disappointing performance.
One investment that was once considered a bastion of the wealthiest business angels is equity finance for small businesses.
But call them angels or dragons, tax breaks from the government have turned on the tap for cash from small investors to flow into businesses desperate for start-up and expansion funding.
Entrepreneurs treading a well-worn path around the banks and City investment funds for cash was once the only way to go for businesses.
Now, the government has turned the tables by opening the door for the less wealthy who want to diversify their portfolios.
If a business has a strong business plan, a measurable market and a strong management team, a new breed of investor can ride to the rescue.
Cutting out the banks
The seed enterprise investment scheme (SEIS) has cut a swathe through the bureaucracy of banks to let investors with up to £100,000 into the market.
Although £100,000 is the annual maximum for SEIS, a number of investors can pool smaller sums and reduce their risk through the scheme.
The rewards can be great if the business succeeds and the SEIS runs the full three-year term and blossoms into profitability.
Not only is no capital gains tax due on any gain in the value of shares, but SEIS is front-end loaded with tax incentives as well – including:
- A 50% tax reduction on income tax paid up to the value of the SEIS investment regardless of the investor’s marginal rate, so basic and higher rate taxpayers all win back income tax paid
- A capital gains tax exemption on asset disposal to raise cash for the SEIS investment
- In the event of a loss on the investment, the deficit can be set off against other income
Altogether, the tax breaks combine to minimise any loss – but investors still need to carry out their due diligence.
Moving on to an EIS
Businesses look to SEIS for start-up capital because they generally cannot raise the cash elsewhere.
Weeding out those showing the green sprouts of growth from among the firms that are more likely to grow as nettles and weeds is sometimes a tough option for angel investors.
For the winners, they can take their money at the end of the term or sign up for injecting growth capital through the Enterprise Investment Scheme (EIS). The tax breaks are not as good as SEIS, but still offer significant protection against risk.
