When many investors think about investing, they often consider investing in the stock market. While nothing is wrong with this, if you are passionate about your local community, it’s always good to dedicate a portion of your portfolio to support your local projects and help your community thrive.
Thankfully, there are several ways you can invest in your local area. These ways include:
Enterprise investment schemes
An enterprise investment plan (EIS) is a government effort to help small or medium-sized enterprises attract investment by granting tax relief.
While an average investor does not require these schemes, they can be beneficial in terms of lowering your tax liability. EISs provide three types of tax relief:
- You can claim up to 30% income tax relief on EIS investments.
- You can defer capital gains tax by reinvesting a gain from selling other assets in EIS shares.
- You can leave them to your heirs tax-free if you have held them for at least two years at the time of death.
In a perfect case, those investing in EISs take advantage of all three characteristics, implying that they only risk a small amount of their investment. Future losses can also be deducted from income taxes.
If you are considering investing in EISs, you should use a specialist fund or provider, which will provide you access to various local companies to invest in.
Due to the illiquidity of EIS investments, it may take some time for the provider to deploy your money and even longer before you receive the requisite certificate to claim tax relief, so plan accordingly.
Furthermore, EIS investment will not necessarily target your local area if done through a provider. Also, an EIS manager, like your adviser, will charge you fees, so inquire first.
Crowdfunding sites and local investor networks are also good places to check, as they are the most direct way to target a certain geographic area.
To get the most from EIS, familiarize yourself with the EIS scheme’s regulations and requirements. This involves understanding the eligibility requirements for EIS investments and their associated tax advantages. The restrictions may differ from country to country, so be sure you understand the unique regulations in your area.
You also should do thorough due diligence on the company or companies under consideration. Examine their business model, management team, financials, potential for growth, competitive landscape, and industry trends.
Consider getting professional assistance or interacting with experienced investors who can provide insights and assist in evaluating the investment opportunity.
Lend your money to local businesses
While EISs are an equity-based investment, you can lend money to local businesses. This is possible through peer-to-peer platforms, which frequently invest in property-secured loans.
Although peer-to-peer lending does not provide the same tax benefits as an EIS, earnings are tax-free if invested through an innovative financial savings account (IFSA).
In the case of peer-to-peer and equity crowdfunding platforms, in addition to investment risks, you should be aware that if the platform you use goes insolvent, your money is often not insured by the Financial Services Compensation Scheme.
Thankfully, the Financial Conduct Authority regulates firms, as client assets must be safeguarded.
So to be safe, you should find regulated local firms such as those running a local fashion blog, magazine, or any other local business. You bear no project risk when you lend directly to a regulated firm.
The likelihood of a firm defaulting on its debt is low, making this investment less risky than ordinary peer-to-peer financing.
When you do this, you have a reasonable middle ground: you still receive a sense of “tangibility” because the money is utilized for specific projects within your local area, and enjoy a lower level of risk.
If you aren’t keen on getting your money back and are merely charitable, you can contribute the interest back, and approximately 10% of the money is routinely returned to the firm so that it can handle more projects.
Support a community shares project
Supporting a community shares initiative is another way to invest in your community. Community shares are utilized when a group seeks to buy a local establishment, such as a pub, to save it from closure or to keep it independent. As an investor, you can contribute small sums and own a piece of the action.
Most investments, whether made through an EIS provider, a crowdfunding site, or a peer-to-peer lender, are extremely illiquid. Some platforms feature secondary marketplaces where investments can be traded.
Selling an asset typically takes around a week. However, there is no guarantee that you will be able to get the money back promptly, if at all if you need it before the investment expires.
This is especially true for non-transferable community shares. You cannot sell your stake to another investor; you must return it to the company if its finances are strong enough to buy you out.
Furthermore, some community share issues do not qualify for EIS status, and the rate of return they provide is flexible.
Always consider the community enterprise’s possible impact on the local community. Assess how their social, environmental, and economic objectives connect with your principles. You also should look for evidence of the enterprise’s track record of fulfilling its goals.
As mentioned above, some risks come with investing in community shares. Assess the hazards associated with the company and the industry in which it works.
Consider market demand, competition, regulatory hurdles, and the possibility of financial loss. Determine your risk tolerance and make an educated decision.
Parting shot
These are some of the ways you can invest in your community. Just like with any other investment, diversification is key. To mitigate risk, consider spreading your investment among various options and sectors.
It is strongly advised that you speak with a financial advisor or tax specialist familiar with local investments. They will assist you in understanding the tax consequences, assessing prospective prospects, and determining your risk tolerance. A professional will also offer advice for your financial circumstances and investing objectives.
Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.
