EIS: A brief background
In 1994, the Government launched a scheme called ‘The Enterprise Investment Scheme’ or EIS for short, and this scheme was created in order to encourage individuals to invest in companies that were in the early stage of their lifespan. It was regarded as an alternative source of funding to more customary sources of capital.
Investing in any company comes with its risks, but it could be said that there are more risks associated with investing in a company that has only just been set up. This is why tax breaks are available in order to balance that risk, while also rewarding the investment. Since its introduction, over 24,000 companies have received investment and as a result of the scheme, over £14.2bn has been raised. Over £1.8bn was raised under the EIS in 2016 alone, according to the HRMC & National Statistics Report back in October.
What are the tax benefits to EIS investors?
EIS offer a number of favourable tax incentives due to the extra risk that comes with investing in smaller businesses, and these are:
- 30% upfront income tax relief – increased from 20% in April 2011 to a maximum £1m investment in any tax year and shares are held for a minimum of three years. This means you could have a maximum tax reduction of £300,000 in any one tax year (providing you had the tax liability to cover this amount). The tax relief is set against the year the shares are purchased.
- After two years you can claim 100% inheritance tax relief;
- 100% capital gains deferral for the life of the investment;
- Tax-free growth and;
- Loss relief
How can I access EIS companies?
Prospective investors can either invest in an EIS ‘fund’ or in single companies. An EIS fund is actually a Portfolio Service usually via a discretionary fund manager. It consists of a manager, who has expertise in EIS or unquoted companies, using their knowledge to select a portfolio of EIS qualifying companies. There are multiple different investment strategies available covering multiple sectors.
Natasha Fathers, Independent Financial Adviser at Hawsons, had this to say: “With the introduction of the tapered annual allowance on pension funding for clients who are high earners; alternative investments such as EIS are definitely forming a greater part of our discussions around financial planning.”
Natasha has achieved Chartered status and is a senior member of the team at Hawsons Wealth Management. You can contact her or the team at [email protected] or 0114 2296557.