How to invest in your local area

Investors typically make the bulk of their returns far away from home. Even if you only invest in companies listed on the London Stock Exchange, you are unlikely to see what difference your money makes in any direct way. But that does not mean that you cannot use a portion of your portfolio to support local projects and help your community thrive.

There are a variety of ways to invest in smaller, local businesses. But with few exceptions, they tend to be high-risk investments suitable for high-net-worth individuals. A lot of small and medium-sized businesses fail and others simply never make money, so if you choose to go ahead, you must be prepared for the risk of losing your capital.

The ‘local’ approach is suitable for people who want part of their portfolio to be about more than just performance, because risk-adjusted returns are unlikely to keep up with those on listed markets. But there is the possibility of killing three birds with one stone by supporting entrepreneurs in your local area, obtaining some notable tax breaks and, if you're lucky, bagging some returns.

Enterprise investment schemes

A tax-efficient way to invest in small businesses is through an enterprise investment scheme (EIS), a government initiative designed to help small or medium-sized companies attract investment by offering tax relief.

EISs are not for the faint of heart, and your average investor does not need them in their portfolio. But they can be useful for reducing your tax liability, which is why Christian Feroze, financial planning director at Investec Wealth, is occasionally in a position to discuss them with clients.

EISs offer three levels of tax relief: you can claim up to 30 per cent income tax relief on EIS investments; you can defer capital gains tax by reinvesting a gain made on the sale of other assets in EIS shares; and you can leave them to your heirs free of inheritance tax as long as you have held them for at least two years at the time of death. In an ideal scenario, those investing in EISs will be able to take advantage of all three of these attributes, meaning they are actually only risking a small portion of their investment, says Feroze. Future losses can also be offset against income tax.

One way to invest in EISs is through a dedicated fund or provider, which will give you access to a few different companies. To a degree, this already has a bit of a ‘local’ feeling. “I’ve been working with a lady who just wanted to support UK companies,” says Feroze. “You can see the underlying companies and you get to know their stories. There’s that element of moving the dial of something small, rather than buying shares in Shell (SHEL).”

Since EIS investments are quite illiquid, it may take some time for the provider to deploy your money, and even longer before you receive the necessary certificate to claim tax relief, so you should plan accordingly.

Additionally, if done through a provider, EIS investment will not necessarily target your local area. And an EIS manager will charge you fees, as will your adviser, so it is worth asking around first. “You might have someone in your network, a friend of a friend, who is starting an EIS-qualifying business,” says Feroze.

Other places to look include crowdfunding sites and local investor networks, which are perhaps the most direct way to target a specific geographic area. The Bristol Private Equity Club, for example, is an organised version of the ‘ask a friend’ approach. It currently has about 100 members and supports local businesses that are looking to raise between £150,000 and £500,000.

Founder and director Julian Telling says the club was set up about seven years ago, when members realised there was a gap in the funding market – there were more opportunities for businesses looking to raise big sums than for businesses in need of smaller amounts. “We thought it was a good way of giving back to the Bristol community and supporting new small businesses,” Telling says. 

Business owners are regularly asked to present ideas, and members then decide whether they want to invest. Not all members will invest in each proposal; being a club rather than a fund means that investments are set up on a deal-by-deal basis. “It’s a Dragon’s Den without the nasty bits of Dragon’s Den,” Telling remarks. The club currently has close to 40 investments spanning a range of sectors, including pharma and biotech. One that has done well is Rovco, a Bristol-based company that specialises in underwater drones. 

Lending

While EISs are a type of equity-based investment, you can also lend money to businesses in your local area. You can do this via peer-to-peer platforms, which often invest in property-secured loans. Peer-to-peer lending does not have the same tax benefits as an EIS, but returns are tax-free if you invest through an innovative finance individual savings account (Ifisa). But with peer-to-peer and equity crowdfunding platforms, as well as considering the risks of investment itself, you also should be aware that if the platform you are using becomes insolvent, your money is not typically protected by the Financial Services Compensation Scheme. However, firms are still regulated by the Financial Conduct Authority and client assets have to be ring-fenced. 

Abundance is a platform through which you can lend money to projects with an environmental impact. While the majority of investments offer support to small companies, at times the platform also facilitates lending to councils to help them fund green projects in their local communities.

In March, Westminster council raised £1mn in just nine days from 485 investors via Abundance. Investors receive a 4.2 per cent annual yield on their investment for five years, at the end of which the capital will be returned. Bruce Davis, co-founder and joint managing director at the platform, explains that since investors are lending directly to the council, they do not take on any project risk. The chances that a council would default on its debt are fairly low, making this type of investment lower risk than standard peer-to-peer lending – although recent events at both Croydon and Woking council show that risks aren’t non-existent. 

This makes it a good middle ground, argues Davis: you still get a sense of “tangibility”, because the money is used for specific projects with an environmental purpose, but you give up some returns in exchange for a lower level of risk. Investors who are purely in it for philanthropic reasons have the option of donating the interest back, and about 10 per cent of the interest is usually returned to the council this way. 

Community shares

Another way to invest in your local area is by supporting a community shares project. Community shares are often used when a group of people want to buy a local venue, such as a pub, typically to save it from closing or to keep it independent. Investors are able to commit relatively small amounts and own a share in the activity.

The Own Our Venues campaign was a recent, prominent example. Earlier this year, registered charity the Music Venue Trust raised £2.3mn from 1,261 investors to acquire the freeholds of nine grassroots music venues and offer them a rent reduction and help with repairs and insurance. The minimum investment was £100, and it offered a 3 per cent annual return. 

Be it via an EIS provider, a crowdfunding platform or a peer-to-peer lender, most of these investments are quite illiquid. Some platforms have secondary marketplaces where investments can be exchanged – Abundance says it typically takes about a week to sell an asset. But as a general rule, if you need the money before the investment expires, there is typically no guarantee that you will be able to get it back quickly, if at all.

That’s particularly the case with community shares, which are non-transferable. You can’t sell your stake to another investor; you can only give it back to the company, if its finances are solid enough to buy you out. In addition, some community share issues do not qualify for EIS status, and the rate of return they offer is not always set in stone.

Latch, a community benefit society that refurbishes derelict houses in the Leeds area to provide housing for homeless people, raised £550,000 via community shares in 2021. Chief executive James Hartley says the aim was to combine the social impact and ethical investing with the financial aspect, offering a 4 per cent rate – which at the time was comparatively attractive. The return was accrued rather than paid out for the first 18 months, and the organisation had the option of not paying out if it could not afford to do so. 

The organisation has since bought, refurbished and let out six properties, with some of the works still in progress. Hartley says a number of investors have chosen to keep accruing interest rather than having it paid. Shares can be realised after April 2024, but there is a cap on how much the organisation will release in any given year. 

As well as through grant funding, Latch normally raises money by borrowing against existing assets, but the community shares model is a more flexible option. “There’s no arguing with the bank about paying it back…with social investment you have more control over the interest and the principal”, Hartley explains, as well as getting new people involved with the organisation. 

Community ownership has been known to go wrong, sometimes quite spectacularly so. In 2014, Hastings Pier Charity raised £590,000 via community shares to help restore and then run the town’s pier, which burned down in a fire in 2010. But running the pier ended up costing more than expected, the charity went into administration, the pier was sold to a businessman for a fraction of the money that had been poured into it, and shareholders lost their capital. 

Of the various options for investing locally, community shares are one of the most skewed towards philanthropy. Dave Boyle, director of The Community Shares Company, which offers support to those interested in issuing such shares, says community investors are typically well-off, higher-educated people in their 60s or older, who are mostly focused on the impact of their investment rather than on returns. They are “happy to invest in something which is going to make the community in which they live wealthier, even though it might not make them wealthier”, he suggests.

“Some people might take the view that living in a community with a cracking local pub adds a certain degree of value to their property, which is greater than the level of investment they’ve actually put into making it happen,” he adds. 

More broadly, this is a solid description of the investor for whom local investing can be a good option. In general, returns are not guaranteed or great, especially now that higher interest rates have made lower-risk fixed income so much more attractive. Risk can be significant and liquidity low, and tax efficiency needs to be carefully evaluated – for most people, there are easier ways to achieve it.

But investing locally remains a good way to combine ethical and social motivations with the potential for returns.