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If you're a regular reader of the GrowthFunders blog, you'll know we talk a lot about two main topics:
With the former, we discuss the benefits of the likes of the Seed Enterprise Investment Scheme (SEIS) and the tax reliefs available with the Enterprise Investment Scheme (EIS) when investing into early-stage companies in the UK.
With the latter, it's all about the vast array of opportunities available to investors who are looking to get involved - or become further involved - in the UK's property market.
On the face of it, there's no direct link, other than you're allocating funds to an asset class with the focus of receiving a return after a period of time (with tax efficient investments into high growth SMEs, this could be several years. For property, it could be as soon as 18 months).
You wouldn't invest into a property deal and expect to receive tax relief on your investments. But conversely, you wouldn't invest into an EIS opportunity anticipating a quick financial return (or a return with the level of certainty seen with property investments, as early-stage companies are considered riskier investments - hence the available tax reliefs designed to help mitigate the level of risk involved).
As such, as a person who would class themselves as someone who primarily invests into early-stage companies and benefits regularly from the tax efficiencies, it can seem that property investment opportunities may not be of any interest.
However, when you move away from the actual specifics behind the investment types and look at them on a higher level, there's one topic that can link them very easily together - diversification.
Diversification can be key to a successful investment portfolio
As an experienced investor, it's highly likely you'll be aware of the merits of diversification.
As a new investor, it's one of the first pieces of advice you'll often receive from a professional.
Simply put, by not having all of your eggs in one basket, you reduce the likelihood of losing money as you aren't relying on one investment or investment type to perform. £10,000 invested across 10 different assets is a much safer option than £10,000 invested into one. You aren't relying on just a single asset to perform well.
We've actually talked specifically about how property can be a great way to diversify your portfolio, but it works both ways - if you're traditionally an investor focused primarily on property, taking a look at an early-stage company looking for an investment under the Enterprise Investment Scheme can add a different element to your portfolio.
For instance, let's say you'd only ever invested in property funds. You invested a regular sum every month and received dividends once a year. For the most part it could be considered a relatively safe investment.
To add a level of risk - and as a result, realise the potential for higher returns - investing into a company eligible for EIS could be the ideal option.
Generally early-stage companies that have some traction and are looking for investment to take them to the next level, the idea is to invest for long-term growth. These companies aren't going to return a huge profit in a matter of weeks, but you may expect 10, 20 or 30x return on your investment after a number of years.
Importantly, with this level of growth comes increased risk. Being early-stage, whilst the business plan should be solid, the fact the company hasn't been established means there's a lack of experience - and therefore the risk is there that a profit may not be achieved and the amount of money invested isn't returned.
But EIS tax reliefs are available to help mitigate this risk. They're designed to encourage investors to invest into such early-stage companies, but recognising they are a riskier investment option, the UK government incentivise investors by offering - amongst others - 30% income tax relief.
And such tax reliefs only become greater when you look at the Seed Enterprise Investment Scheme (SEIS), which, generally speaking, is for companies who are at a stage prior to EIS.
Including 50% income tax relief (that means by investing £1,000, you can take £500 off your income tax bill), the increased tax reliefs are there because the risk is even greater. The potential for considerable growth is there, but given that these companies are really at the start of their business journey, you can see how the expectations may not be realised.
Investing for income or growth
What's more, diversification can be achieved when we drill down further into a specific investment opportunity or investor requirement.
Let's imagine you were a regular investor in EIS-eligible opportunities. Generally making you a growth-focused investor, many would class this as a way to supplement other income streams, eyeing a financial return every couple of years.
Now let's also imagine you wanted to increase your monthly income, something that can be achieved through generating regular yields with various property investment opportunities.
Buy to let is the most common of the property investment options that can return a regular yield, but investments into property funds can, too - generally six- or 12-month dividend payments - and some of the new property bonds are discussing monthly and quarterly payments.
Combining these together, you're able to generate a regular income that is then - should everything go as expected - supplemented with growth-based returns from your EIS investments.
Reducing your tax liabilities as an investor
Now when you are generating an income or achieve gains as an investor, you're ultimately going to be liable to pay some form of tax on them (either in the form of income or Capital Gains Tax). It's simply an inevitability - if you're making a profit, the tax man is going to want his cut.
Whilst regular investors into tax efficient investing schemes such as the EIS and SEIS will be fully aware of the numerous tax reliefs available, property investors may be anything but - yet understanding just how beneficial they can be can feel likely a truly eye-opening moment.
Let's take EIS tax reliefs as an example.
Imagine you'd bought a property for £100,000 and sold it 12 months later for £120,000. You've made a gain of £20,000. On the assumption you've already used your Capital Gains allowance for the year (or even if you haven't, but don't want to use it here), you'll be liable to pay CGT at a rate of anywhere up to 28%. That could mean that of your £20,000, you hand over £5,600 to the HMRC in the tax year the gain is incurred.
However, if you invested that £20,000 gain into an EIS eligible investment opportunity, you could wholly defer your capital gain until the point at which you dispose (i.e., sell) the shares you purchased from the company in question.
What's even more interesting is that as any gains from an investment into an EIS opportunity aren't liable to CGT themselves, you could - in theory - invest into a company under the EIS, sell your shares should they increase in value, receive a tax-free gain from the sale and use that to pay off your deferred CGT liability that was gained when selling the original property.
And this is a relatively modest example for the EIS, as there is effectively no restrictions to the amount that can be deferred. As the HMRC state, "there is no upper limit on the amount you can invest in EIS shares in a year, though the amount you can invest in a single company is limited."
This also doesn't take into account the 30% income tax relief you can claim on your investments, nor the tax reliefs of the EIS's sister scheme, the Seed Enterprise Investment Scheme (SEIS). We explain more about the SEIS tax reliefs here, but in essence, you can receive 50% income tax relief on your investment and 100% capital gains tax relief - invest a capital gain into a SEIS-eligible opportunity and you can essentially write off your CGT liable from that gain. Not defer. Completely and utterly remove the liability.
Understanding your requirements and expectations as an investor
The whole focus of this piece is to highlight that just because you traditionally prefer tax-efficient investments or property investments, it doesn't automatically mean the others shouldn't be given some level of consideration.
As an investor, you'll have your preferences, your expectations and your focuses. You'll know what you want to achieve and particularly if you're an experienced investor, no doubt have an understanding of which asset types will help you achieve this.
And if that's primarily via property investing, brilliant.
However, if it's via investing into EIS or SEIS-eligible opportunities, that's fantastic, too.
But the two don't need to be mutually exclusive. Yes, they may not have a direct link or one that immediately suggests an investor in one would automatically be interested in the other, but there is undoubtedly a link there with diversification at least - and for many, it could be the perfect link to help bolster and improve your wider investment portfolio.
