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Tax Efficient Investing

Experienced investors: maximising startup investments

Following a Q1 that saw record investment into UK startups, and a Q2 in which the government announced further long term plans to back the nation’s early stage innovators, experienced investors have been fast to shift focus toward the most beneficial routes for investing in the UK’s next wave of high growth startups. 

More than £5.1 billion was invested into UK startup and scaleup companies in the first 3 months of 2021 alone -  a 21% rise on the previous quarter that saw a record period for startup investment across Britain.

Off the back of a peak pandemic period that highlighted the nation’s reliance on flexible, reactive early stage companies as a tool for innovation, the rise has been symbolic of the increasing confidence investors have put in early stage companies as a tool for considerable growth and generous tax advantages.

Further bolstered further by Business Secretary Kwasi Kwarteng’s July announcement that proposed a £22 billion “Plan for Long Term growth” that puts startups and the technology sector at the heart of its mission, investor confidence in the UK startup landscape has well and truly returned after a period of uncertainty surrounding Covid-19.

 

Making the most of your startup investments as an experienced investor

When first faced with the question of “How can I invest in a UK startup company?”, a host of options often emerge from what can appear an initially straightforward question.

From established, government led investment methods like the Enterprise Investment Scheme (EIS) and Seed Enterprise Scheme (SEIS) that encourage billions of pounds in investment every year, to less regulated routes such as equity crowdfunding that are often more frequently occurring, investors have the ability to utilise a range of tools when looking to invest in UK startups.

Where - for the more everyday investor with less intense growth goals - routes such as the latter can serve as helpful segways into startup investing, for more experienced investors targeting higher growth and more generous tax efficiencies, three routes are commonly identified as the most effective - the EIS, SEIS and Venture Capital Trusts (VCTs).

Approved as three of the most prolific routes for UK startup investing, the government’s 2021 ‘Build Back Better Plan for Growth’ quotes the methods as “three of the most effective for targeting market failures in SMEs’ access to growth finance” reporting the three to have “together supported over £31 billion of finance since their introduction.”

But regardless of the growth oriented, tax efficient similarities that have made the approaches so popular to private investors and growing enterprises alike, the schemes do possess a number of differences.

 

The EIS & SEIS for startup investing

Introduced in 1994 and 2012 respectively, the EIS and SEIS are government-led initiatives, both created with the goal of stimulating the UK startup and scaleup landscape by connecting private investors with promising early stage SMEs.

Having raised growth capital for over 45,000 companies since their inception, the EIS and SEIS’s range of generous tax advantages have played a major role in the schemes’ meteoric popularity.

 

Read More: Why 2021 could be the best year for investors to benefit from EIS tax reliefs 

 

Offering investors as much as 30% income tax relief (50% with the SEIS due to its focus on very early stage startups), capital gains tax exemption, inheritance tax relief and a host of other tax benefits, the EIS and SEIS are ideally suited for experienced investors looking to achieve significant growth whilst minimising the downside risks associated with investing in startups.

These tax benefits can make the schemes particularly attractive to experienced investors looking to save for later life, reduce their tax bill and/or actively diversify their portfolio through investments across the host of industries they accommodate.  

From digital threat intelligence providers like Intelligence Fusion exporting crucial security data around the globe, to cutting edge digital ordering companies like Qikserve who have helped thousands of hospitality branches flourish throughout the pandemic, EIS and SEIS-eligible opportunities can be applied across a wide range sectors, contrasting in industry and mission.

Made accessible via EIS and SEIS-eligible co-investment platforms, by utilising these schemes investors have the ability to invest into potentially high growth startups, benefit from generous tax advantages and balance their portfolios’ risk profile simultaneously -  all whilst contributing to the UK’s thriving startup scene.

 

Venture Capital Trusts

Though when addressing the query of “How can I invest in a startup company most effectively?” the EIS and SEIS often emerge as the two primary routes offering the most generous advantages, Venture Capital Trusts do offer an alternative avenue for start up investors.

Venture Capital Trusts are private investment companies that float on the stock exchange, and unlike the EIS and SEIS, distribute investor capital autonomously across a range of pre-decided portfolio companies. 

As opposed to schemes such as the EIS and SEIS (that facilitate private investment into individual startups and generate returns upon exit), VCTs receive investor capital and have full autonomy over its distribution - often selecting a portfolio of around 20-70 companies to distribute it across.

Should the portfolio perform well as a whole, the VCTs shares price will increase and with it the value of the investor’s pledge.

 

Read More: EIS vs VCT: which is right for your investment portfolio?

 

Also classified as tax efficient investments, VCTs do offer some tax reliefs upon investment (including both income tax relief and CGT exemption) although don’t offer the same depth, and scope of tax advantages that the EIS and SEIS do.

Though a potentially effective route for investors looking for little autonomy over their investment portfolio and less intense target growth, for experienced investors desiring more ambitious growth goals, extensive capital shielding benefits and a greater degree of personalisation, the EIS or SEIS can be more favourable approaches.

 

Selecting the appropriate startup investment for your portfolio

In the midst of an arguably monumental period for UK startup investing, more so than ever experienced investors are diligently assessing the pros and cons of potential investment routes and investment opportunities.

In an attempt to be first in line for what is forecasted to be an equally significant upcoming few years, selecting the appropriate startup investment route best suited to an investment portfolio could reap especially significant benefits.

Where low-autonomy, gradual growth portfolios may gravitate towards VCTs, and those angled towards higher target growth and more generous tax advantages may be better suited to the EIS and SEIS, regardless of portfolio maturity or investor goals, the post-Covid wave of startup innovation set to increase in scale, valuation and importance will undeniably open up a new door of opportunity for investors across Britain.

Presenting a vital chance to educate the next generation on the high risks and volatility early stage investment can be prone to, this period also offers investors a prime opportunity to bolster the impact of their portfolio, establish a solid financial foundation for later life using tax benefits, and become a part of the next wave of innovative startups transforming British business. 

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Growth Capital Ventures (GCV) is backed by funds managed by Maven Capital Partners, one of the UK’s leading private equity and alternative asset managers.