If you’re an investor looking for opportunities to invest in UK businesses, there is a government-backed scheme known as the Enterprise Investment Schemes (EIS) that offers some attractive tax relief opportunities.
In this article, we will explain what the EIS scheme is, how EIS tax relief is putting more cash back in the pockets of investors, and how it’s helping startups and small businesses in the UK get the funding needed to grow.
What is the EIS?
The EIS was introduced in 1993 and is a form of tax relief designed to help startups and small businesses raise investment funds by offering tax relief to investors.
There are some obvious benefits to investors, but it’s designed to be a win-win for both investors and businesses.
Most small businesses and startups fail within the first year due to lack of funding as their options are limited.
The best form of funding is from private investors, but from the investor’s side, the risk is always the downside.
When a company is eligible for EIS, the tax relief benefits offset some of that risk, and since its inception it’s estimated that investors have invested more than £20 billion via the scheme.
What are the tax reliefs?
An overview of the tax reliefs and benefits offered to investors investing in EIS eligible companies are
- Up to 30% income tax relief – this is applied against either this year’s tax bill or last year’
- The ability to defer capital gains made elsewhere.
- No Capital Gains Tax liability if your investment does well, this essentially means tax-free growth.
- The ability to offset losses if an EIS investment does not work out, reducing the risk associated with investing in startups and new businesses.
- Provided you hold your EIS investment for at least two years and you still hold it on your death inheritance tax is free.
As you can see, there are some significant tax advantages when investing in an EIS company. The decision should still be based on the strength of the investment, however, and most investors use EIS to diversify their investment portfolio.
Risks associated with EIS investments
Even with the generous tax reliefs, it’s still possible to lose money when investing in an EIS eligible business.
The scheme is designed to help new and emerging businesses. These are the businesses that statistically speaking, are most likely to fail.
Investing is a risky business, you still need to do your due diligence and invest smartly. But when your investment money helps a company grow, you’re going to see much greater returns.
Something to keep in mind is that the initial 30% tax relief means the value of your investment has to decrease by 30% before you’re out of pocket.
That’s a good baseline to get started with, and you can also write off any losses against capital gains tax and other income.
Who is EIS investing best for?
A typical EIS investor is a high-net-worth individual with a passion or an interest in investing in emerging and early-stage businesses.
They will often work with businesses in industries they know well so they can share their expertise, and usually have experience investing in businesses in general.
It’s also an attractive proposition for investors with high tax bills as they’re able to leverage some of that tax against their investments.
