What are the different types of investors?
Investors will usually fall into one of three categories;
- Everyday investors
- Sophisticated investors
- High net worth individuals
Anyone can become an everyday investor, as long as they have not invested (and will not invest) more than 10% of their net assets per year in shares, bonds, funds or other securities that are not listed on a stock exchange.
A sophisticated investor is someone who has at least one of the following;
- Made more than one investment in an unlisted company in the last two years
- Been a member of a network or syndicate of business angels for at least six months
- Worked in a professional capacity, in the last two years, in the private equity sector or in the provision of finance for small and medium enterprises
High net worth individuals
You can self-certify as a high net worth individual If you earn at least £100,000 a year, or have net assets - excluding property and pensions - of at least £250,000.
What are the different types of tax-efficient investments?
There are a number of ways you can invest tax-efficiently. These can be divided into;
- Enterprise Investment Schemes (EIS)
- Seed Enterprise Investment Schemes (SEIS)
- Venture Capital Trusts (VCT)
ISAs were set up by the government to encourage saving and investing, and they benefit from a number of tax reliefs.
With an ISA, you can invest up to £20,000 in the 2019/20 tax year without paying tax on the investments.
There four main types of ISA;
- Cash ISA
- Stocks and Shares ISA
- Lifetime ISA
- Help to Buy ISA
Pension contributions up to the annual allowance of £40,000 - or 100% of your income if lower - can be made with tax relief at your prevailing rate of income tax.
This allowance tapers over £150,000, reducing by £1 for every £2 over the £150,000. The effect of this is that contributions are effectively tax free up to your annual allowance.
Enterprise Investment Scheme (EIS)
EIS is a type of Venture Capital Scheme, and it’s designed to promote investment into unlisted early-stage businesses.
EIS offers investors the ability to back unlisted businesses, which generally represent higher risk due to their early stage and lack of liquidity. This is offset by a raft of tax reliefs, including the headline income tax relief of 30% on the value of your investment, as well as capital gains deferral on invested gains and exemption on growth achieved.
Seed Enterprise Investment Scheme (SEIS)
The younger sibling of the EIS, SEIS was launched in 2012 to cater for the earliest of all businesses seeking investment. This scheme provides support for the first £150,000 of external equity capital a business raises within its first two years of trading.
Representing this highest level of risk for investors, the SEIS tax reliefs are similar to - but greater than - those of EIS, with 50% income tax relief upfront and reinvestment relief that allows investors to reclaim 50% relief on a reinvested gain. These, along with the similar capital gains exemption on disposal and loss relief, ensure a potential total exposure as low as 13.5%.
However, it should be stressed that these are the earliest of the early businesses and are therefore the riskiest, with limited liquidity and a potentially long wait to an exit, if any.
Venture Capital Trust (VCT)
A VCT is a listed company in its own right that pools investment to then distribute to build a managed portfolio of investments into eligible companies.
As this structure allows investment into slightly later stage businesses, the reliefs offered are slightly less generous, but this represents the reduced risk profile of these companies. Income tax relief of 30% can be claimed upfront and the dividends paid are not subject to income tax without affecting your dividend allowance for the year. Similarly, the growth that is achieved is not subject to capital gains tax, however the loss relief offered through the more risk-focused investments is not available for this managed approach.