Angel investing is one of the smart ways to generate passive income in the UK, but many qualified individuals do not do so for one reason: they believe in the wrong information. To avoid missing the opportunity to grow your money and help businesses, start debunking these common myths:
1. Angel Investors Are Venture Capitalists
Angel investors are not venture capitalists. In fact, their roles are the direct opposite of the latter. For one, many of these angels are individuals, not corporations or companies. They also don’t pool resources from other investors as the VCs do. Instead, most of these angels use their own money to finance businesses. In some cases, however, the angels themselves can create a unified fund for the company.
Both VCs and angel investors can work with startups. The significant difference is when they come in. Angels usually invest during the early stages of the business. VCs, meanwhile, can enter when the company requires additional funding.
2. Angel Investing Is Very Risky
This is true, but only to a certain extent. Any investment carries some risks, whether you’re an angel investor or a venture capitalist. The biggest challenge in angel investment is timing. These businesses are more likely new startups that are still taking their baby steps or experiencing birth pains. The risks of folding are high. But angel investors can mitigate that in different ways. First, they can limit this type of investment to 10% or less of their portfolio.
Second, they can contribute their knowledge and expertise to make sure the business succeeds or takes off. Then, they can recover their investment or even obtain some equity shares. Third, the government provides tax reliefs. One of these is SEIS or Seed Enterprise Investment Scheme.
With a qualified SEIS investment, you can take advantage of certain tax-related benefits. For example, you may claim 50% of your contribution up to £100,000 as income tax savings. You can also avoid paying the hefty capital gains tax for the profit you gain from the sale of your shares if you hold such assets for three years.
3. Anyone Can Be an Angel Investor
To become an angel investor in the UK, you need to be self-certified either as a high-net-worth individual or a sophisticated investor. The latter has more requirements, including your company or business role as well as the number of companies already invested in.
It’s easier to become a certified high-net-worth individual. That means a net income of more than £100,000 or net assets exceeding £250,000, excluding your private residence and pension funds. That seems pretty high, but it doesn’t mean it is not attainable. The UK has thousands of angel investors.
Angel investing isn’t for everyone, but for those who try it, the possibility of earning a lot is high. Most of all, it is gratifying, especially since you can help other businesses succeed like you.
Once you overcome the common misconceptions about angel investing, you will learn the benefits far outweigh the risks and challenges. There’s no reason why you shouldn’t consider it, especially if you have significant idle assets.