Investment in start-ups with EIS an ‘attractive asset class’

With changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT) likely this year, research by FounderCatalyst has suggested that investing in start-ups with HMRC’s Enterprise Investment Scheme (EIS) could be an “attractive asset class”.

New analysis from the legal-tech firm revealed the number of start-up investments needed in order to receive the optimal return is approximately 25 – leading to a 2.77 times return, or a 3.19 times return, when taking into account the 30% tax relief with EIS.

FounderCatalyst stated that returns would be even higher if using the Seed Enterprise Investment Scheme (SEIS).

The firm’s research indicated that this optimal number of investments is higher than the actual average number of investments made by angel investors – the term for those who provide capital for a business start-up. This average number of investments, which the figures revealed sits at 17, shows that many angel investors could optimise their portfolio by increasing its size over time.

FounderCatalyst said its findings suggest that despite the coronavirus pandemic, UK start-ups are an attractive asset class for investors, especially given the SEIS and EIS tax relief – which would be exempt from any increases to CGT and IHT.

“Angel Investing is increasingly seen as an attractive asset class especially at a time when tax reliefs are being squeezed and CGT and IHT are under review,” said FounderCatalyst COO, Sam Simpson.

“Angel wisdom has always dictated that you ‘shouldn’t put all of your eggs in one basket’ but I’ve never been able to find an analysis of exactly how many eggs I should have to optimise my portfolio. This analysis shows a portfolio of 25 companies is the sweet spot.

“It would be remiss not to acknowledge that angel investing isn’t for everyone – it is a relatively illiquid asset class – and to take advantage of the SEIS and EIS schemes you need to hold the investment for at least three years. Before investing, you should also consider the potential impact of coronavirus and Brexit on the business model of the investee company.”

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