Angel investing explained: how it works, the risks and the tax reliefs

Angel investing explained: how it works, the risks and the tax reliefs

Angel investors are individuals who put their own money into young private companies, usually in exchange for shares and often before any fund will. This guide covers who may invest, the ways in, what research says about returns, portfolios and follow-on reserves, and the UK and US tax reliefs, as the official sources stated them on 26 September 2026.

Risk warning. Early-stage investments are high risk and illiquid. Many of the companies angels back fail, you may not be able to sell your shares for many years, and you can lose all the money you put in. Only invest money you can afford to lose entirely, and spread it across several companies.

What an angel investor does

An angel usually buys newly issued shares at pre-seed or seed stage, or invests through an instrument that converts into shares later, such as a SAFE or a convertible note. Funding rounds explained and Ways to fund a company describe the stages and instruments from the founder's side.

In the British Business Bank's UK Business Angel Market 2020 report, surveyed angels' median initial investment in the 2018/19 tax year was £45,000 (mean £108,000). The median angel made two new investments a year, respondents had held 17.1 investments on average over their investing lives, and 86% had used EIS or SEIS during 2018/19.

Who can invest: the UK and US rules

In both countries a company raising money privately, or a platform promoting its shares, relies on legal exemptions that depend on the investor's category.

UK: high net worth and sophisticated investors

Promoting shares in an unlisted company to the public is restricted. The Financial Promotion Order lets such promotions go to individuals who have signed one of these statements within the previous 12 months:

• High net worth individual (article 48). In the last financial year you had an annual income of £100,000 or more (not counting one-off pension withdrawals) and/or net assets of £250,000 or more. Net assets exclude your main home, any loan secured on it or equity released from it, your pension and rights under insurance contracts.
• Self-certified sophisticated investor (article 50A). In the last two years you have worked professionally in private equity or in finance for small and medium-sized businesses, been a director of a company with annual turnover of at least £1 million, or made two or more investments in an unlisted company. Or you have been a member of a business angel network or syndicate for more than six months and still are.
• Certified sophisticated investor (article 50). You hold a current written certificate from an authorised firm saying you understand the risks of that kind of investment.

These tests apply from 27 March 2024, when SI 2024/301 brought the thresholds back down after a short-lived increase to £170,000 income and £430,000 net assets. On 26 September 2026 legislation.gov.uk listed no outstanding changes to the statements. By signing, you accept that you may receive promotions that do not comply with FCA rules, and that you can expect no protection from the FCA, the Financial Ombudsman Service or the Financial Services Compensation Scheme. The statement ends: "I accept that I could lose all of the money I invest."

FCA-authorised crowdfunding platforms follow separate FCA rules (COBS 4.12A). Before showing you an investment offer, a platform must place you in a category: high net worth, sophisticated, or "restricted investor" (someone who declares they will not put more than 10% of their net assets into these investments). It must also check the investment is appropriate for you, and give first-time investors a cooling-off period of at least 24 hours.

US: accredited investors

The SEC's accredited investor definition (page last reviewed 24 April 2026) covers individuals who:

• had income over $200,000, or $300,000 together with a spouse or spousal equivalent, in each of the past two years, and reasonably expect the same this year;
• have a net worth over $1 million, alone or with a spouse or spousal equivalent, not counting their primary residence; or
• hold a Series 7, 65 or 82 licence in good standing, are a director or executive officer of the company selling the shares, or are a "knowledgeable employee" of a private fund.

Two exemptions under Rule 506 of Regulation D show why this matters. Under Rule 506(b) a company may not advertise, and may sell to no more than 35 non-accredited investors in any 90-day period, each of whom must be financially sophisticated. Under Rule 506(c) it may advertise, but every buyer must be accredited and the company must take reasonable steps to verify that.

Non-accredited investors can back start-ups through Regulation Crowdfunding, within limits set out in the SEC's investor bulletin. If either your annual income or your net worth is below $124,000, you can invest the greater of $2,500 or 5% of the greater of the two in any 12 months. If both are at least $124,000, the limit is 10% of the greater, capped at $124,000. Accredited investors have no limit, and crowdfunded securities generally cannot be resold for one year.

Other countries have their own rules; see our guides for India, the UAE, Saudi Arabia and Pakistan.

The ways angels invest

Route	How it works	Who does the diligence	What to check
Directly	You find a company, agree terms and invest in your own name	You	Share class, investor rights, reporting
Angel network or group	Members see screened pitches and decide individually, often investing together	Shared, but the decision is yours	Fees, how deals are screened
Syndicate	A lead investor agrees the terms; backers invest alongside, sometimes through one vehicle or nominee	Mostly the lead	Lead's record, fees, the lead's profit share
Crowdfunding platform	You invest online in raises the platform lists, often with low minimums	Platform checks plus your own	Authorisation, nominee set-up, plans if the platform closes
EIS or SEIS fund	A manager spreads your money across several qualifying companies	The manager	Fees, number of holdings, when tax certificates arrive

For a first-time angel, a group offers shared screening and experienced co-investors. TrustList lists angel networks, including trade bodies such as the UK Business Angels Association and the US Angel Capital Association. Crowdcube and Republic Europe are examples of equity crowdfunding platforms. For funds, HMRC recognises "EIS knowledge-intensive approved investment funds": the manager receives the companies' certificates and sends you form EIS5 to claim relief (gov.uk). You can also browse companies raising now on TrustList's Companies raising board and ask for an introduction.

What returns look like

The detailed studies of angel exits are old and self-reported, but they show the same pattern.

• UK. Siding with the Angels (Nesta and the British Business Angels Association, May 2009) covered 158 UK angels, 1,080 investments and 406 exits. 56% of exits returned less than the money invested, most of them nothing. 9% returned more than ten times the money and produced nearly 80% of all the positive cash flows. Across all exits, angels got back 2.2 times their capital over an average 3.6 years, roughly a 22% gross IRR.
• US. The Angel Capital Education Foundation and Kauffman Foundation study (November 2007) of 538 angels, 3,097 investments and 1,137 exits found an overall 2.6 times multiple, an average holding period of 3.5 years and an average IRR of 27%.
• UK, more recent. In the British Business Bank's 2020 survey, 44% of the exits angels reported for 2018/19 broke even or lost money, 35% made positive returns, and 3% (10 deals) returned more than 20 times.

Treat these figures with care. They are gross, ignoring fees and the angel's own time; the angels who answer surveys may be the more successful ones; and a few outliers drive the averages, so the most likely result of any single investment is a loss.

The research also suggests effort pays. In the Nesta study the median time spent on due diligence was 20 hours, a quarter of investments had less than a day of it, and investments with at least 20 hours had significantly fewer failures. Angels investing in industries they knew also failed less often. Our guides on evaluating an early-stage company and finding deals and doing due diligence cover that work.

Why a portfolio matters

Because a few investments produce most of the money, how many companies you back matters as much as how well you pick. Nesta estimated, using US data, that an angel with a portfolio has about a 60% chance of ending up in profit.

Worked example (an illustration with invented figures, not a forecast). An angel puts £100,000 into 20 companies at £5,000 each over several years:

Outcome	Companies	Money returned
Fails, nothing back	10	£0
Partial loss (0.5x)	1	£2,500
Money back (1x)	2	£10,000
2x to 3x	4	£45,000
5x	2	£50,000
20x	1	£100,000
Total	20	£207,500 (2.1x)

Eleven of the twenty lose money, close to the loss rates in the studies. Had the one 20x company failed instead, the portfolio would have returned £107,500 on £100,000, roughly break-even after years of waiting. With five companies rather than twenty, the chance of missing a winner altogether is much higher.

Follow-on reserves

Companies that survive usually raise again. Existing shareholders are often offered the chance to invest more, sometimes through a pro-rata right in the shareholders' agreement, to limit dilution. Some angels hold part of their budget back for this.

The data urge care. In the Nesta study, 29% of exits involved a follow-on investment by the same angel, and those did markedly worse: 1.2 times overall against 2.2 times for the whole sample. The 2007 US study found the same pattern (1.4 times with a follow-on, 3.6 times without). One possible reason is that struggling companies ask existing investors for bridge money. Nesta concluded that spreading money across more deals looked more attractive than following on.

A sensible approach:

• Decide before your first cheque how much you will hold back, and when you will use it.
• Judge each follow-on as a new investment, not a way to rescue an old one.
• Check the UK tax position. EIS income tax relief is not available on new shares in a company where you already hold shares, unless those earlier shares were issued when the company was formed or had a compliance statement submitted for them, as SEIS or EIS shares do (gov.uk).

Time and illiquidity

• Years, not months. In the Nesta sample, failures took 3.2 years on average to play out, while exits returning more than ten times took about eight years, with essentially no way to sell in between.
• Tax holding periods. UK SEIS and EIS reliefs need you to keep the shares for at least three years.
• Resale limits. US private-placement shares are "restricted securities", and Regulation Crowdfunding shares generally cannot be resold for a year.
• How exits happen. In the British Business Bank's 2020 survey, trade sales and liquidations made up 59% of exits, and 10% were sales to another angel, a venture capital fund or private equity.
• Your own time. Pitches, due diligence, advisory work and tax paperwork take hours the return figures do not count.

UK tax reliefs: SEIS and EIS

HMRC's guidance for investors (updated 6 April 2026) sets out the two schemes most angels use:

	SEIS	EIS
Maximum you can claim relief on per tax year	£200,000	£1 million, or £2 million if at least £1 million goes into knowledge-intensive companies
Income tax relief	50%	30%
Minimum holding period	At least 3 years	At least 3 years
Gains when you sell	Free of Capital Gains Tax if income tax relief was given and not withdrawn	Same
Relief on other gains	Reinvestment relief: 50% of a gain reinvested is exempt, up to £100,000	Deferral relief: tax on a gain is deferred if you invest from one year before to three years after the sale that produced it
Losses	Can be set against income	Can be set against income

For comparison, Venture Capital Trusts give 20% relief on up to £200,000 a year, with a five-year holding period.

Rules worth knowing:

• Relief is limited to the tax you owe. It cannot be carried forward, but you can treat an investment as made in the previous tax year.
• Shares must be new, full-risk ordinary shares paid for in cash, with no arrangement to protect your investment.
• You must not be "connected". Holding more than 30% with your associates, or being an employee, rules you out. SEIS allows directors; EIS generally excludes paid directors.
• You need the company's certificate (SEIS3 or EIS3) before you claim, and you can claim up to five years after 31 January following the tax year of the investment. HS393 and HS341 explain the claim.
• Advance assurance is not an endorsement. HMRC says investors should do their own due diligence.
• Relief can be withdrawn if you sell within three years, the company stops qualifying, or you become connected; you must tell HMRC within 60 days.
• Losses. If you sell at a loss, the loss minus the income tax relief you kept can be set against your income for that year or the year before. The general cap on income tax reliefs (£50,000 or 25% of income) does not apply to losses on EIS or SEIS shares. If a company fails but still exists, a negligible value claim treats the shares as sold; if it has been dissolved, you are treated as having disposed of them at dissolution (HS286).

Worked example (an illustration). An additional-rate taxpayer in England, paying 45% on income over £125,140, invests £10,000 and has enough tax to use the relief in full:

	SEIS	EIS
Income tax relief	£5,000 (50%)	£3,000 (30%)
Net cost	£5,000	£7,000
If the company fails: loss after relief	£5,000	£7,000
Loss relief against income at 45%	£2,250	£3,150
Money finally lost	£2,750	£3,850

If the company is sold after three years for four times the money, the £30,000 gain is free of Capital Gains Tax under either scheme. Scottish income tax bands differ. The reliefs shrink the loss; they do not turn a poor company into a good investment.

US tax: qualified small business stock (Section 1202)

Section 1202 lets individuals exclude some or all of the gain on "qualified small business stock" (QSBS). Public Law 119-21, enacted on 4 July 2025, changed it for stock acquired after that date:

• Tiered exclusion. 50% of the gain after three years, 75% after four and 100% after five or more.
• Higher cap. The gain you can exclude per company is the greater of $15 million (up from $10 million, and indexed for inflation for tax years beginning after 2026) or ten times your basis.
• Bigger companies qualify. The company's gross assets must not exceed $75 million before and immediately after the shares are issued, or $50 million for stock issued on or before 4 July 2025, according to the IRS Schedule D instructions. An IRS webinar script confirms the $15 million cap.

Stock acquired on or before 4 July 2025 keeps the old rules: it must be held for more than five years, with up to 100% excluded for stock acquired after 27 September 2010 (IRS Publication 550). The shares must be in a domestic C corporation and acquired at original issue for money, property or services. At least 80% of the company's assets must be used in a qualifying business; services such as health, law, consulting and financial services, and businesses such as banking, farming and hotels, are excluded (Publication 550).

If an investment fails, Section 1244 may let you treat up to $50,000 of the loss a year ($100,000 on a joint return) as an ordinary loss rather than a capital loss (Publication 550). Ask an adviser how SAFEs and convertible notes affect the holding period, and check your state's treatment.

How to get started

1. Set a budget you could lose entirely, spread over many companies, several years and more than one sector, with a share held back for follow-ons.
2. Confirm your status. In the UK, read the investor statement before signing; in the US, check whether you are accredited.
3. Join a network or syndicate and co-invest alongside experienced angels at first. Start with the angel networks and accelerators on TrustList.
4. Build a flow of deals from networks, platforms and the Companies raising board.
5. Do the work on each deal. Use our due diligence resources and the investor guides linked above.
6. Keep your paperwork in order. File every SEIS3 or EIS3, record share numbers and dates, and consider an accountant who knows the schemes. Our UK and US funding guides describe the wider market.

About this guide

This guide is general information, not financial, legal or tax advice. TrustList does not arrange or advise on investments, and a company appearing on the Companies raising board is not a recommendation. Rules and figures were checked against the linked sources on 26 September 2026; take independent advice before you invest.