The Enterprise Investment Scheme (EIS) is an initiative by the UK government offering a range of attractive tax incentives to encourage investment into growth companies by private investors.
EIS has helped many small companies develop new technology, new drugs, engineering innovations, biotech, fintech and data processing solutions. The latest figures show over 24,500 UK businesses have raised more than £14 billion of development capital through the scheme. This has proven vital for the small and medium sized enterprises (SMEs) and a driving force in nurturing future UK growth.
In the November 2017 budget, the government doubled the investment limits for “knowledge intensive” companies.
Here we look at who ultimately benefits from such generous tax breaks?
There’s no doubt that Isas and pensions are tax-efficient homes for your cash, the Enterprise Investment Scheme has certainly also proven popular for UK investors.
Investors back early stage companies seeking much higher returns than is typically available from investing in established listed companies.
To offset the risk of investing into small companies, the Government provides generous tax benefits: investors who invest for a minimum period of three years benefit from 30 per cent tax relief as well as exemption from capital gains tax (CGT) and inheritance tax (IHT) which means growth within the EIS is tax-free.
With the doubling of investment limits, individual investors can potentially reduce their tax bill by £600,000 per year. About 4,000 investors a year are expected to benefit from the increased investment limit, according to Treasury estimates.
Another attractive perk of investing in EIS companies is relief on losses. If you incur a loss from EIS shares at any time, the loss can be offset (after Income Tax relief already claimed) against income tax for that year or the previous year.
For higher rate tax payers, the combined EIS tax reliefs can return up to 61.5% of monies invested in unsuccessful companies. Whilst all EIS investments must be considered as high risk, such downside protection has made the investment much more appealing to private investors.
There are additional benefits such as deferring CGT liabilities on investing into an EIS scheme, you can sell an asset up to the same value and defer any CGT due. CGT can also be deferred from assets of an equivalent value sold up to three years prior to the investment.
EIS schemes are also useful for IHT planning, as investments fall out of your estate after only two years.
For working examples of EIS click here.
For investors with greater risk appetite, the Seed Enterprise Investment Scheme (SEIS) offers more extensive tax breaks in return for providing very early, stage capital to start-ups. We will not go into further detail here but SEIS tax breaks can be as high as 86.5% of investment – a generous downside protection for high rate tax payers. For more information on SEIS click here.
All EIS investments are in private companies and capital is only returned if the companies achieve a successful AIM listing or a trade sale. So when investing in EIS, you need to hold for a minimum of three years but should be able to afford to lock money away for longer periods. For these reasons, EIS is most suitable for wealthy investors who have used their annual Isa and pension allowances and who understand and are willing to accept the higher risks involved.
For more details on all EIS tax benefits click here.
Moreover, the onus should be on the underlying investment and not the generous tax breaks. Small companies can grow very quickly because they are coming from a low base. With a small company, you’re more likely to lose your money, but you’re also more likely to make double, treble, or an even bigger multiple of the amount invested.
If you are interested in investing into private companies in search of the higher returns possible, company selection is key. If you are happy with the investment then the EIS benefits are a very welcome bonus.
CSS Partners has been identifying and offering EIS investments to private investors through our free, non-advisory service since 2001. For more information click here.
The government set up the Enterprise Investment Scheme to encourage wealthy investors to back small companies which might otherwise seem too risky.
This is great news for start-up entrepreneurs; the EIS has consistently provided more money for early-stage companies than the venture capital industry with over £4.27 billion raised over the last three tax years.
To achieve full tax benefits, investors need to hold for a minimum of three years. This means the companies can develop a medium term business development strategy.
In the November 2017 budget, the government doubled the investment limits for “knowledge intensive” companies. The change is expected to add £7bn to the total committed to early-stage enterprises.
The move is part of the government’s patient capital review designed to stimulate growth in early-stage businesses. A consultation paper published by the Treasury in August 2017, Financing Growth in Innovative Firms, identified a £4bn funding gap between US and British firms and looked at ways to ensure start-ups were receiving access to the financing they needed.
At the same time, the Chancellor announced measures to crack down on investments promoted as EIS qualifying in companies where asset preservation is the priority rather than providing development capital for growth. It has been estimated that in 2016-17, almost two-thirds of investments in funds under the scheme were in projects regarded as low risk. These investments have been marketed to investors as ‘capital preservation’ plans, where a return was virtually guaranteed once the tax breaks were taken into account.
Such projects can expect to be be refused EIS qualification going forward, it is not clear whether benefits will be withdrawn retrospectively.
The UK has become a hub for European technology start-ups. Whether you feel Brexit will prove beneficial or not in the long term, it has added to current business uncertainty. If we want to be at the forefront of innovation and compete with the major US and Chinese technology giants in the future, it is essential to provide development capital to SMEs. EIS has become a vital tool to encourage wealthy investors to provide this much needed support.
It is hoped the EIS initiatives, alongside investment through the British Business Bank and also the government’s new industrial strategy which aims to boost investment in artificial intelligence, medical science, electric cars and clean energy, can collectively lead to innovative companies developing into national technology champions and put right the lack of global winners produced in the UK. If this does happen then the UK government might also see a stellar return through corporation tax revenues, offsetting the upfront cost of tax benefits to investors. Obviously, in this scenario investors would also be seeing very high returns. The government will only receive high corporation tax returns from companies that are true to the spirit of the EIS and use the capital to fund rapid growth plans; hence the crack down on asset backed and capital preservation EIS plans.
The information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.
Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.