Bank of England policymakers are hinting that the UK may be heading for negative interest rates, for the first time in history. The BoE has recently taken the total stimulus to £895bn, with an additional £150bn in stimulus announced last month.
With interest rates already at 0.1% and double-dip recession forecasts, we explore how negative interest rates would affect savings and investment portfolios.
In the event of negative interest rates becoming a reality, banks would have incentive to lend more by making loans cheaper, but account holders would likely be asked to pay to hold money in a savings account.
While plans for negative interest rates are pending, government bonds are already selling at a negative yield of -0.003%, with investors hoping for the safe haven of government-issued bonds paying out to get their money back in three years.
Between negative returns on savings accounts, lower yield on bond holdings, a volatile stock market and a projected dip in property prices, investors don’t have many options to diversify their portfolio in a negative rate interest environment.
However, for investors that are comfortable with risk, early-stage investing may be the answer. Angel investors support early-stage companies through financial backing, typically in exchange for equity in the company. An additional benefit for angel investors are the generous tax reliefs offered under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
How negative interest rates would impact High Net Worth Individuals
With stimulus packages to be extended over the course of 2021, Bank of England policymaker Gertjan Vlieghe noted that banks have already been contacted regarding their preparedness for what could be an earth-shattering move.
If the economy continues to shrink in the upcoming months, the BoE might cut interest rates below zero to encourage greater lending activity.
“If interest rates are cut so far that they fall below zero […] negative rates should encourage borrowing and discourage deposits and savings.” explained Azad Zangana, Senior European Economist & Strategist at Schroders.
High Net Worth Individuals would accrue losses from lower yields on bonds and annuities. In addition to that, they would be the first savers to be impacted, through both business and personal accounts.
As banks are charged to keep money with the central bank, they would start passing on negative rates to individual savers. While companies would be incentivized to take out loans, they would pay fees on deposits.
Charges are likely to be imposed on any savings over a certain amount, starting with the accounts of high net worth individuals.
What is angel investing and why you should be looking into it
An angel investor (also known as a private investor, seed investor or angel funder) supports early-stage enterprises by providing funding and getting actively involved in the business. Typically, the amount invested is between £5,000 and £50,000 per investment.
Early-stage investments are high risk as the number of early-stage businesses that grow through to an exit is low. Previous research suggested that 56% of investments in early-stage companies went bust. This is why experienced angels aim to build a diverse portfolio of 20+ investments.
Although deemed as precarious, early-stage investments come with the advantage that investors can buy company shares – in a business that has identified an addressable market, yet to be exploited – at a much lower price.
While angels usually have to wait a number of years before recovering their initial investment, returns can be considerable. Due to the high risk nature of angel investing, high net worth individuals are usually looking for a 2.5x Return of Investment (RoI).
Angels are often highly experienced in business and provide more than financial support. They can support companies with know how, partnerships and strategic direction.
When first starting out, an investor should look for a well put together business plan with a defined exit strategy. Many angels choose to join in an angel network when starting out, where investors can pool investment capital and invest alongside like-minded, experienced investors.
Tax relief through EIS and SEIS
In order to encourage investment in start-up companies which play a vital role in the economy, the UK government has launched several tax relief programmes, including the Enterprise Investment Scheme (EIS). This scheme, which makes investing in early stage enterprises tax-efficient, has encouraged £22bn in investment in 31,365 companies.
By investing in an EIS eligible company, angels receive income tax relief of 30% of the amount subscribed for eligible shares. Investors can put in up to £1m per tax year in EIS qualifying companies for the tax relief; this cap rises to £2m if investing in knowledge-intensive EIS companies.
In order to qualify, companies have to be trading for less than 7 years and can only raise a maximum of £12m.
Through EIS, angels receive a Capital Gains Tax exemption, carry back and loss relief which can be offset against CGT or Income Tax.
Looking at a practical example:
If an angel invested £10,000 and the company failed, their actual loss would only be £7,000, due to the 30% income tax relief. However, a top rate income taxpayer paying tax at 45% will be able to claim loss relief on their tax liability at the 45% level. In this example, they’re eligible for further relief of £3,150, making their actual loss £3,850.
The success of EIS led to the introduction of the Seed Enterprise Investment Scheme (SEIS), promoting investments in riskier, earlier stage companies. About 80% of UK angel investors seek relief through EIS or its sister scheme, SEIS.
SEIS allows HNWIs to invest up to £100,000 and receive 50% tax relief on their investment. In order for companies to be eligible for SEIS, they have to be trading for less than 2 years and cannot have more than £150,000 in previous investment.
Hot investment sectors
Reports from the British Business Bank and the UK Business Angels Association reveal that many investors are still seeing positive returns during the pandemic.
While angels are battling economic uncertainty, around three quarters are optimistic about the market bouncing back within the next 12 months.
Healthcare, Digital Health and MedTech, BioTech, Life Sciences and Pharmaceuticals are the leading sectors in terms of investor engagement during the COVID-19 crisis.
Software as a Service and FinTech have fared well throughout the pandemic and are still attracting a large number of investors.
Getting started with angel investing is now easier than ever, with an array of angel networks that can provide advice and support in getting started. Industry-association, the UKBAA offers an Angel Investment Accelerator which is designed for those new to early-stage investing.
First-time investors should pick angel networks that can operate digitally, usually through the use of a digital platform. Platforms typically offer a filtering function which delivers filtered deals straight to users’ inbox. Instead of attending dozens of virtual pitching events or trawling through hundreds of opportunities, an investor can hone in on deals specifically fitted to their preferences.
In order to choose the right angel network, HNWIs should look for the most active networks; Research body Beauhurst recently published a list of the most active networks in the UK.
The best networks cover a variety of regions, sectors and investment sizes, and they’re forthcoming with examples of previous investments so first-time angels can make the right choice on how to grow their portfolio.
So while looming negative interest rates may require a rethink of your current investment portfolio – it might also open you up to a new and exciting investment class that offers much more than just financial gains.
If you do decide to invest in early-stage companies, the team at the Envestors Private Investment Club can guide your through due diligence and which opportunities to choose. We’ve secured over £100m+ in funding from a network of over 4000 investors.