The Enterprise Investment Scheme was introduced in 1994 to encourage investment in entrepreneurial business ventures. The aim was to encourage growth and innovation in an important part of the economy by incentivising investment in new businesses using tax reliefs. On 6 April 2012 a number of changes to EIS were introduced by the Finance Act 2012.
Introduction
Investing in small unquoted companies carries significant risks over other potential investments such as established businesses that are quoted on a stock exchange. Specific operational risks are high and liquidity risk means that investors may not be able to sell their holdings easily. This means that small businesses often find it difficult to raise traditional forms of finance.
In order to give small businesses more support in these difficult stages of their development and to provide additional compensation for the risks faced by investors, the government introduced the Enterprise Investment Scheme.
How Does it Work?
Investors who invest in companies for a minimum of 3 years can receive income tax relief on 30 per cent of the amount invested. In addition, any investment through an EIS receives an exemption from capital gains tax and inheritance tax. After 2 years EIS investments fall out of a person’s estate for the purposes of IHT. Therefore growth through an EIS can effectively be tax free.
2012 saw the introduction of the Seed Enterprise Investment Scheme (SEIS) which offers even greater tax breaks. The SEIS encourages investment in start-up businesses specifically giving investors 50 per cent Income Tax relief on the amount invested.
Typically investments are made in individual companies or in funds which are managed by professional venture capitalists. The potential diversification benefits of the latter may reduce some of the risks involved but additional fees may apply.
Considerations
There are detailed rules that investors must comply with in order to qualify for an EIS. Similarly there are also detailed rules for companies that are seeking to qualify for an EIS. These provisions can be complex so professional advice is always recommended to ensure that the qualifying requirements will be met.
EIS investments are not likely to be suitable for many investors due to the significant risks involved. Liquidity risk is the most obvious because potential investors must be able to tie up funds for significant periods of time. Advice should be sought from an appropriate investment professional before investing in EIS schemes.
If you have any questions about the Enterprise Investment Scheme as an investor or a business Rollingsons has experienced lawyers who can assist you (although we cannot give tax and accountancy advice). For more information please contact James Crighton via e-mail jcrighton@rollingsons.co.uk or by telephone on 0207 611 4848.
