My mate is starting a new business and wants me to invest. Should I lend him the cash or buy shares in his new company?
If the business fails you are more likely to get your money back from a loan than as shares, especially if the loan is secured on the assets of the business. If your loan is not repaid you can claim a capital loss, which can be used against your other capital gains, if you have any. If you subscribe for shares and the company fails you can claim the amount paid for shares as an income tax loss, which is usually better for tax purposes. If the business is very successful you won’t make a profit from the loan if the business is later sold for a huge amount, or becomes listed on the stock exchange. To realise those gains you need to hold shares in the company.
