Venture capital comes with a very encouraging selection of benefits for investors who have the capacity to take on a high risk investment. Is the risk worth the reward? Here are some of the benefits so you can make a decision for yourself.

Note: this list relates specifically to investment in venture capital via the Enterprise Investment Scheme (EIS), which is open to UK taxpayers.

a table showing performance details of companies in the Access EIS Fund portfolio.

1. Income tax relief

EIS shareholders can claim 30% of the amount invested as income tax relief. This can be applied to the year the shares were issued, or carried back to the following year.

2. Capital gains tax deferral and disposal

EIS shareholders can defer a portion of a capital gain equal to the amount invested in EIS, so that no tax becomes due on that gain while they continue to hold EIS shares.

There is also no capital gains tax to pay on the disposal of EIS shares, providing they have been held for at least three years when they’re disposed of. Note, this relief requires the investor to have made a claim for income tax relief.

3. Inheritance tax relief

After holding EIS shares for two years they qualify for business relief, meaning they are exempt from inheritance tax.

4. Loss relief

In certain situations when a company value falls below its ‘effective cost’ (the amount invested, less anything claimed in income tax relief), loss relief can be claimed and applied to income tax or capital gains tax.

a table showing performance details of companies in the Access EIS Fund portfolio.

5. Increasing return potential of an existing portfolio without increasing risk profile

Research by Hardman & Co found that including an optimal proportion of venture capital can have a positive impact on portfolio returns while maintaining, or reducing, the overall portfolio risk.

6. High annual allowance for additional retirement planning alongside pension

For investors affected by the taper on pension contributions who are looking to put their money to work and benefit from significant tax reliefs, EIS’ offers a significant annual maximum investment that qualifies for tax relief. Currently, the limit is £1m – meaning total income tax of £300,000 can be claimed. However, this limit increases to £2m if the first million is invested in Knowledge Intensive Companies.

7. Diversification of existing portfolios

Investment in small businesses via EIS allows investors to diversify their holding into privately-held companies. The fact that many funds are sector agnostic also means that investors can diversify across industries too.

8. Investments in private companies enjoy a buffer against market volatility

Investments in the private markets enjoy something of a buffer against the kinds of market volatility that affect publicly traded companies.

9. Huge developments across tech, AI, and the startup industry since 2021.

In 2021 the venture capital market saw a huge surge in the number of new businesses founded and levels of investment into VC. In part, the surge in businesses being founded was fuelled by the COVID-19 pandemic, which caused significant changes in consumer behaviours and requirements. But it was also affected by major developments in generative AI (like Chat GPT), and technology more generally, particularly in relation to climate.

Globally, by comparison with 2020, investments rose in every major region. In North America and Europe investment activity more than doubled in 2021. In North America, every quarter in 2021 doubled levels in the previous year’s quarter; this resulted in a 131% increase in total VC investment value for the year. At the same time, Europe grew 135% over 2020.

The UK technology sector alone saw £29.4 billion invested; 2.3x 2020 investment levels.

For investors looking to build their venture capital portfolio, recent developments in technology and a surge in levels of tech investment make this a very exciting time to start building your portfolio.

10. Falling valuations

The flipside of the surge in investment in 2021, thanks in part to increasingly difficult market conditions, was a fall in startup valuations through 2022 and 2023, particularly among later stage companies. While this isn’t great news for existing shareholders, many VC funds and investors considered valuations pre-2021 to be excessively high, and some funds even delayed deployment until valuations fell to more realistic levels. So if you’re considering investing in venture capital, investing now, as valuations fall, will see you get more for your money.

The risks

Investing in early-stage startups is high risk. These are highly illiquid investments, and a large proportion of these businesses will fail. However, if you have capital that you can afford to lose, and you are looking to diversify your portfolio beyond mainstream investments, putting a certain amount into eligible companies does offer the potential for significant returns.

If you are worried about the risk, read more about how our EIS fund reduces it by building large portfolios and co-investing with the UK's top angel investors. We also suggest speaking with a professional about investment or tax advice prior to making any decisions.

To find out more about how the Access EIS Fund can work for you or your clients. Use the button below to schedule a call with our expert, Tom Britton.

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