As April fast-approaches and the end of the tax year on the horizon, now is a busy time for investors who are looking to make the most of the Enterprise Investment Scheme. With the success of the vaccine roll-out and the roadmap out of lockdown set in stone, this is an exciting time for investment and to support SMEs across the UK, and with business confidence at a six-year high and service sector optimism at its highest level since 2004, now might be the best time to invest through the scheme.
Additionally, the pent-up demand and lockdown spending are sure to help businesses recover post-lockdown, which is attractive to investors looking to capitalise on this tax-efficient investment. The UK’s investor community is crucially important to the small business sector in Britain so taking advantage of the EIS will play a key role in supporting SMEs and helping the UK economy recover post-pandemic.
The Enterprise Investment Scheme (EIS) and is a UK government scheme designed to help smaller higher-risk trading companies raise finance, by offering a range of tax relief to investors who purchase new shares in those companies. As an investor, EIS benefits you by offering potentially significant income tax and capital gains reliefs when you make an investment into an EIS eligible start-up or business. EIS also provides 100% exemption from inheritance tax for investors, as well as CGT deferral relief that lets you treat the gain as not arising until a future date if you acquire EIS shares.
EIS offers an alternative to traditional bank lending for businesses, especially to innovative, IP-based SMEs, which is integral at a time when many small businesses have struggled through the pandemic and some banks have withdrawn from traditional SME lending and consulting. Through EIS, investors can support British businesses whilst taking advantage of generous, Government-backed, tax efficiencies at the end of the tax year.
It is possible to ‘carry back’ all or part of your EIS investment to the preceding tax year as long as the limit for relief is not exceeded for that year. The limit for EIS is £1m per tax year, rising to £2m provided £1m of this is invested in knowledge-intensive companies. This means that you can make a subscription of £3m EIS shares in 2019/20 with a carry back of £1m to 2018/19 so long as your EIS cap for 2018/19 is not exceeded.
Luke Davis, CEO of IW Capital said, “The EIS is one of the UK Government’s most successful initiatives in terms of driving investment into high-growth early-stage companies. It has helped produce some incredible business successes that otherwise may not have got off the ground due to the reluctance of banks to lend to these firms. With investor confidence and sentiment both back on the rise and with thousands of new businesses starting up over the past year, there are some fantastic opportunities to invest and support the growth of British firms that are expanding and hiring.
“There are significant opportunities for growth for businesses who have pivoted or adapted quickly, or that offer services that cater to our new way of living and working. This often leads to higher employment rates, especially in the SME sector.
“When the EIS income tax relief was extended from 20% to 30% in 2011, the amount invested in small companies through the scheme saw a tremendous jump. If the Government were to extend the scope or tax efficiencies of the scheme again, it could really help catalyse private investment – a crucial source of growth finance. While any increase in tax reliefs would impact the revenue of the treasury, this would very likely be more than balanced by increased taxes on business revenues and those on new employees – as we have seen previously with the scheme.
“The EIS has also funded some hugely innovative companies which are now tackling this crisis. Investment in this sector will be key to encouraging economic growth, with the SME arena historically employing around half of the private sector workforce and accounting for 99% of all businesses.”