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When the economic environment gets more challenging, you’d think there would be fewer opportunities to invest in game-changing, innovative companies, right?

Now, this might surprise you.

 
 

Some of best-known businesses backed by venture capital were formed in the doom and gloom of uncertain periods.

There’s Zoopla, Uber, and Airbnb. They all flourished in the wake of the 2008 financial crisis. 

So, what’s going on?

 

Periods of recession bring about difficult conditions for all businesses. Some will fail. Unemployment rises. These are well-documented effects of a slowing economy.

What you might not realise is that for investors in early-stage businesses, these very same conditions can also create compelling conditions for entrepreneurs.

Seizing the moment

Malcolm Ferguson, a fund manager at Octopus Ventures, explains:  “We may be in the best period in over a decade to start, and therefore invest into, a new company.”

 
 

“Some of the biggest household names were formed the last time we faced a challenging global economic environment, including Zoopla, a company we backed from an early stage.”

“Although new challenges and headwinds exist in 2023, there are a number of very powerful tailwinds.”

“As unemployment rises, we expect to see better availability of top talent. Scarcity of funding should reduce the level of competition around investing in the best businesses. And we’d expect incumbents to cut investment in innovation, creating windows of opportunity for new start-ups.”

 

“All in all, we’re very excited about what the next few years have in store for the UK venture capital ecosystem. “

Accessing venture capital through an Enterprise Investment Scheme (EIS)

A managed EIS portfolio can be an ideal structure for investors seeking high growth from early-stage companies.

With an EIS, growth is tax free, which is a compelling tax benefit when investing in companies with high growth potential. Of course, not every EIS-qualifying company will experience significant growth. In fact, around 55% of early-stage companies fail within the first five years1. So, the fact that loss relief can be claimed against income or capital gains tax for those companies that fail in an EIS portfolio, irrespective of the performance of the portfolio overall, is hugely valuable. These tax reliefs, combined with 30% upfront income tax relief provide a very attractive way to invest in early-stage companies.

 

Targeting growth and supporting client tax planning with EIS

The latest results from the Office of Budget Responsibility forecast that capital gains tax receipts (CGT) will hit a high of £15.9 billion in 2022-23.3 In addition to this, the Annual Exempt Allowance, the tax-free allowance for capital gains tax every individual receives each year, is reducing from £12,300 to £6,000 from April 2023. It will reduce further to £3,000 from April 2024. This means more taxpayers will be dragged into a capital gains tax liability when they dispose of assets.

CGT will be front of mind for many advisers and clients, particularly business owners, and you may have clients who need to plan for a capital gain this year or next. Read this blog from Octopus to learn more.

Key risks to bear in mind

  • The value of an EIS investment can fall as well as rise. Investors may not get back the full amount they invest.
  • Tax treatment depends on individual circumstances and may change in the future.
  • Tax reliefs depend on the portfolio companies maintaining their EIS-qualifying status.
  • The shares of smaller companies could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.

1Office for National Statistics, Survivals and growth by size, June 2020

 

2Association of Investment Companies, March 2023.

3Capital gains tax, Office for Budget Responsibility, 18 January 2023.

EIS investments are not suitable for everyone. This communication does not constitute advice on investments, legal matters, taxation or any other matters. Investors should read the product brochure before deciding to invest, this can be found at octopusinvestments.com. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: March 2023. CAM012792.

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