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Why is tax efficient investing appealing to younger investors?

As an investor, the UK is arguably one of the best countries to be in. The opportunities for most asset classes are considerable and varied, and for many the multiple tax reliefs and incentives that are available when investing in the next generation of British businesses are hugely favourable.

For those note aware, the process of tax efficient investing applies primarily when you’re investing into early stage businesses, and the two main schemes are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). The former is aimed at very early stage businesses, whilst the latter is for slightly more established businesses, but who undoubtedly still fall under the startup banner.

Read more: 9 simple reasons EIS is one of the UK's best investment schemes

With both schemes offering fantastic benefits and incentives to the investor and the entrepreneurs behind the company, I’ve invested into both schemes personally to date, but have always considered myself to be in the minority for my age. However, over the past few months in particular I’ve seen a notable increase in the popularity of not just the process of investing in general amongst my generation, but an increase in interest surrounding tax efficient investing.

So drawing on my own experience - and understanding why I personally find the likes of SEIS and EIS attractive propositions as an investor - I wanted to explore three key points that could be making the process of tax efficient investing appealing to younger generations as a whole.

1. The tax reliefs can allow you to bring more risk into your portfolio

As a younger generation we have the potential for a long career of investing ahead of us. We could very easily invest regularly for 50 years. For this reason, adding risk to a portfolio can be easier to manage than someone later in life. There’s obviously a whole host of caveats here, but if we have five decades ahead of us, it’s easier to weather any rough patches than it is for someone who’s looking to exit their investments in a few short years.

However, just because we may have a greater risk appetite, that doesn’t mean we’re OK with the prospect of losing money. It’s for this reason why the tax reliefs available play a huge role, as it means you are effectively putting less capital at risk when making an investment.

For example, if you invested £1,000 into an EIS-eligible company - considered a higher risk option - you can claim back 30% - £300 - of that off your income tax bill. This takes the amount you’ve actually invested down to £700. Furthermore, should the investment go as intended, returns aren’t subject to capital gains tax, but conversely, if the company does not perform as well as hoped and the value of your shares decreases, there’s the ability to claim loss relief on your investment, reducing the amount of capital at risk even further.

It’s important to point out here that although younger generations may have more time to see any ups and downs even out, it doesn’t remove the fact that any investment portfolio should be as diverse as possible, taking into account various asset classes and sectors, as if one sector drops in value, you are in a better position able to weather the loss by making up for it with the other sectors.

2. The variety of startups is huge

The UK has some of the best investment schemes in the world when it comes to investing and we are very fortunate as a nation that entrepreneurship and investing is encouraged from an early age. The British startup sector is thriving and there are so many brilliant and innovative companies being founded all the time. This means the opportunities to invest are vast and there is such a wide variety of choice available depending on which sectors take your interest.

Being part of Generation Z, we’ve grown up through one of the most rapidly changing times when it comes to technology in particular. We’ve seen the rapid growth and increasing popularity of Augmented Reality, Virtual Reality, Artificial Intelligence, self driving cars and so many more. Our interest is piqued by a huge array of different points, that for many it’s difficult to pick one area that we’re truly interested in, and so it’s not surprise that this can be reflected in our investment portfolios.

It’s generally recommended to invest in something you know well and/or enjoy, and for our generation in particular the ability to do this has never been so great. As I said, startups are being created so frequently in every possible sector that for many, it’s not a case of searching for the right company to invest in, but it’s actually the reverse - determining which of a growing number to choose from.

3. Tax efficient investing can be one of the easiest ways to make an impact

As a younger generation we have shown that we want to make an impact. We want to truly make a difference in the world. In fact, 60% of Generation Z interviewed said that they wanted to make a difference, whilst 76% said they are concerned about humanity's impact on the planet.

With there obviously a huge array of ways to make such a difference, when it comes to investing, this can undoubtedly be one of the easiest ways to make a difference and an impact in the world in numerous ways.

Read more: can you invest for impact and still see a financial return?

For example, if you were to invest into an early stage clean energy company, you would be giving them the vital funding they needed to grow and prosper as a business, resulting in them better achieving their aims of providing clean energy to people across the globe. Your capital will have played a key role in that happening and that is something to be immensely proud of, but for more than the end impact - you could be directly linked with job creation or supply chain development, both of which make a difference to so many people.

As time goes by we are becoming more and more aware of the need for things like clean energy and other technologies that help us prosper; processes that mean we can live longer and have less of a damaging effect on the world around us. It’s therefore inevitable that there are more and more investment opportunities appearing based on this - and this can only be seen as a positive. .

You can make a difference with tax efficient investments

The ability to invest in a tax efficient way isn’t new. The Enterprise Investment Scheme itself has been around since 1994, and this a scheme to supersede one that had been in places for many years prior.

But the popularity of tax efficient investing has undoubtedly increased in recent years, and I’ve seen first hand its increased awareness in the younger generations - and when coupled together with our desires and expectations, it’s no real surprise that tax efficient investing is becoming more and more appealing to younger investors.

If you are new to investing and based in the UK then you are very fortunate as the UK offers the most support to investors when they are backing the next generation of British businesses. Not only that but investing has so many benefits and the tax reliefs are just some of them. You really could be making a huge difference by putting your capital to work, all whilst targeting a financial return on your investment.

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