With the current economic climate in the UK and the new Chancellor’s first budget announcement in October, the investment landscape has become more challenging both for investors and early-stage businesses seeking funds. However, both groups have an important role to play in the UK economy and innovation ecosystem that shouldn’t be underestimated.
Angel investment is vital to a successful economy. The ideas and technologies that are being developed by innovative start-ups, particularly those in the life sciences and green tech sectors, are potentially groundbreaking. But if these fledgling companies don’t attract the funding they need to commercialise their ideas and grow, then the economic benefits such as job creation and export sales – as well as their innovations – could be lost.
The good news from the recent budget was that there was no change to the Enterprise Investment Scheme (EIS), which is an initiative whereby private investors get a significant tax break for investing in innovative ‘high risk’ companies. EIS is absolutely fundamental to angel investment. It helps to de-risk what is a high risk business for investors as these companies are at an early stage of their commercial journey with little or no ‘track record’s.
People underestimate how tough a journey it is for entrepreneurs. You have to incorporate, develop a product or service, bring it to market, finance it, find customers, monetise it, develop it and build it. Angels can bring invaluable expertise and contacts in addition to much needed funds to that journey. EIS is really an essential underpinning market function in encouraging angels to put their money as well as time into supporting the early development of fledgling companies. More could be done to promote the scheme to higher rate UK taxpayers, especially as it has now been extended for a further 10 years.
Prior to the budget, however, EIS investments were also free of inheritance tax as private companies qualified for Business Property Relief (BPR) is a longstanding relief from inheritance tax. The recent budget has changed that. Private companies, like EIS eligible assets, will now be subject to tax on inheritance, so that’s a blow to some investors who think about EIS as part of their estates being gifted to their inheritors.
With angel investments, it is all about High Net Worth Individuals (HNWIs) and there was a sense that the budget was a bit of an onslaught on wealth holders (with the threat of more to come). This has made some investors nervous and more cautious about early stage investments.
There is also a specific concern about how these unlisted EIS assets in private companies will be valued. For an angel investor, an investment might take 5 to 10 years (even 15 years) to come to fruition and therefore they might not be around to see it. Now, however, it might have tax implications for the inheritors. This is problematic because nobody quite knows what an investment will be worth and how to value it on inheritance. Will they be valued at cost price or the last valuation funding round?
Risk appetite is about sentiment and currently sentiment has been impacted by a combination of higher interest rates, higher taxes, and geopolitical concerns.
It’s hard to judge yet how the recent budget has impacted on investment appetite. We should have a clearer idea by the end of the current fiscal year. What we do know however is that HNWIs are not a uniform group with identical attitudes towards risk, tax benefits and the merits or demerits of inheritance tax management. As a result I would expect that there will be some HNWIs that decide to up their investment in tax relieving instruments, particularly if they have specific taxes to offset, such as from capital gains; and I would also expect there to be some HNWIs that may decide not to reduce their investments in riskier assets.
At Oxford Innovation Finance, we’ve been connecting investors with carefully selected businesses through our angel investment community, Oxford Investment Opportunity Network (OION), for over 30 years. OION is one of the largest and most active angel investment networks in the UK, and we believe strongly in the importance of our mission. Despite the latest headwind, we will continue to support entrepreneurial activity and champion innovation. However, we would certainly welcome a more supportive policy framework.
The future of our economy depends on a consistent pipeline of entrepreneurs and innovative high growth businesses. There have been ebbs and flows throughout history, but this is an inflection point that marks a small step back in encouraging entrepreneurship and investment. The big concern is that the next budget might bring tougher measures. We urge the government to think carefully about this situation.
Jens Tholstrup, Executive Chairman, Oxford Investment Opportunity Network (OION)