Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong.
Risk Summary

Estimated reading time: 2 min

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  • You could lose all the money you invest
  • Most investments are shares in start-up businesses or bonds issued by them. Investors in these shares or bonds often lose 100% of the money they invested, as most start-up businesses fail.
  • Checks on the businesses you are investing in, such as how well they are expected to perform, may not have been carried out by the platform you are investing through. You should do your own research before investing.

You won't get your money back quickly

  • Even if the business you invest in is successful, it will likely take several years to get your money back.
  • The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
  • Start-up businesses very rarely pay you back through dividends. You should not expect to get your money back this way.
  • Some platforms may give you the opportunity to sell your investment early through a 'secondary market' or 'bulletin board', but there is no guarantee you will find a buyer at the price you are willing to sell.

Don't put all your eggs in one basket

  • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well. A good rule of thumb is not to invest more than 10% of your money in high-risk investments. Learn more here.

The value of your investment can be reduced

  • If your investment is shares, the percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
  • These new shares could have additional rights that your shares don't have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

You are unlikely to be protected if something goes wrong

  • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker.
  • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated platform, FOS may be able to consider it. Learn more about FOS protection here.

If you are interested in learning more about how to protect yourself, visit the FCA's website here.

For further information about investment-based crowdfunding, visit the crowdfunding section of the FCA's website here.

Industry Insights

SEIS, EIS, ISA - a quick guide to investment acronyms

Given the longer or complex names of various investment-related terms, it's inevitable acronyms are used. For many, it's often to the extent that the acronym becomes more popular than the phrase itself.

As with all acronyms, if you're using them daily, understanding them is easy - but if you're new to the world of investing, knowing your EIS from your BPR can be more than a little complex!

And so in this post, we wanted to produce a quick, simple and straightforward reference point for a variety of acronyms we use on a daily basis.

SEIS - Seed Enterprise Investment Scheme

This tax relief, offered to individual investors, was put in place to help small, early-stage companies raise equity finance, attracting investors to their offering with up to 64% tax relief. The shares must be held for three years to qualify for the tax relief and in addition to the reliefs, any profit made upon the disposal of the shares is tax exempt, too.

SEIS can be applied on the first £150,000 worth of share capital a company raises, but this must be completed within three years of a business commencing trading.

EIS - Enterprise Investment Scheme

The EIS is the SEIS's older sister and is designed to assist slightly more established companies to attract investors to their early growth capital rounds. This tax relief - of up to 30% - has the same restrictions as SEIS in the way the shares must be held for three years, but any profits are tax exempt.

The idea of EIS is that a business will use SEIS for their proof of concept round or seed round, and EIS will then be used for their seed or super seed round.

Again, the EIS eligibility has an expiry date and a business must use it within two years of the subscription.

ISA - Individual Savings Account

ISAs are different to conventional savings accounts, largely because the interest on cash or capital gains from investments is completely tax free.

As of July 2017, there are seven different types of ISA:

  • Cash ISA
  • Stocks & Shares ISA
  • Innovative Finance ISA
  • Lifetime ISA
  • Help To Buy ISA
  • Junior ISA
  • Flexible ISA

Each having their own purpose (which we've detailed in our tax efficient guide to investing), an individual can put money into one of each kind each tax year, with the 2017-2018 tax year limit being £20,000 across all accounts (i.e., £2,250 could be invested into four ISAs and £11,000 in one - subject to individual product limits that apply to Lifetime ISAs and Help to Buy ISAs - giving a total investment of £20,000).

BPR - Business Property Relief

A type of tax relief, BPR was originally established in 1976 to prevent family businesses having to be sold to settle Inheritance Tax bills. BPR offers Inheritance Tax relief at either 50% or 100% on the transferring of suitable business assets.

At the higher end of the relief, this would generally consist of running, or having a financial interest in, a business. At the lower end, it often relates to land, buildings, machinery or plant equipment that's used only (or primarily) for business activities.

IHT - Inheritance Tax

When an individual passes away, tax needs to be paid on a percentage of their estate (i.e., the value of any property they own, money in the bank, etc). This is called Inheritance Tax.

The amount of Inheritance Tax the individual needs to pay is dependent on various characteristics, but most notably the value of their estate. Currently, the standard rate is 40%, and this is paid on all amounts above £325,000 (or £425,000 if the estate includes a home that is passed to direct descendants).

CGT - Capital Gains Tax

Relateing to the tax you're required to pay on the increase in value of certain assets you've bought and subsequently sold, there is currently a tax free amount of £11,300 (and £5,650 for trusts). Above this level, you will pay CGT at a rate depending on your annual income (earnings and capital gains combined) and on the nature of the asset.

There are various exemptions from CGT, but conversely, CGT isn't exclusive to simply selling an asset - it applies however you may dispose of it (gifting it or swapping it are two other examples).

VCT - Venture Capital Trust

A Venture Capital Trust is effectively a company, listed on the London Stock Exchange, that invests in other companies. Introduced over two decades ago in 1995, they've proven to be one of the most tax efficient investment opportunities currently available.

VCTs are required to invest a minimum of 70% of their value in companies that are either privately owned or listed on the LSE Alternative Investment Market (AIM).

This focus on early-stage companies is similar to investments in EIS-eligible and SEIS-eligible companies, but the key difference is VCTs manage these investments on your behalf. This provides you with built-in diversification (but does also incur a charge).

With dozens upon dozens of investment related acronyms, these are just some of the most notable. Feel there should be some added to the list, or want to understand more about a certain acronym? Let us know.


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