25 Jun Tax Factors – The Rules Are Changing But EIS Remains A Prime Investment Driver
It’s easy to take something for granted once it has become part of the furniture.
Take the Enterprise Investment Scheme (EIS). Introduced in 1994, the scheme was intended to encourage equity investment in small companies. As the Government minister in charge back then, Michael Portillo put it: “The purpose of Enterprise Investment Schemes is to recognise that unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well-targeted means for some of those problems to be overcome.”
And EIS has been a huge success. Since 1994 more than 26,000 companies have received around £16bn in investment, according to the latest Enterprise Investment Association figures running up to 2016. A sister programme – the Seed Enterprise Investment Scheme has also been been hailed as a success.
Four tax incentives are on offer to EIS investors. First and foremost, anyone investing in an EIS qualifying company can take advantage of 30% income tax relief – a saving that essentially de-risks the investment. In addition, the scheme also offers a capital gains tax deferral. This kicks in when money from a capital gain is reinvested in an EIS company. In addition, capital gains tax relief is available on profits made from an EIS investment. And finally, EIS can also be used for tax management purposes to help investors reduce inheritance tax bills.
Providing tax incentives to encourage investment seems like an obvious move on the part of any government and perhaps that’s why it’s easy to forget that similar schemes are not necessarily available elsewhere in the world. Arguably, the success of the UK’s startup and early stage, fast-growth company culture – which attracts more investment than anywhere else in Europe – is at least partly due to the presence of both EIS and SEIS.
That’s not to say that the schemes aren’t open to criticism. It could be argued that EIS has tended to skew investment towards qualifying companies. Or to put it another way, investors may be driven by tax breaks rather than a comprehensive assessment of all the available opportunities. Nevertheless, any scheme that encourages investment – especially in a time of economic uncertainty – must on balance, be considered a good thing.
A Change in The Weather
In his 2017 Budget Chancellor Philip Hammond pledged continued support for EIS and targeted a further £20bn in investment through the programme over the following ten years.
However, the Government increasingly takes the view that EIS tax reliefs should focus on fast growth companies within the innovation economy. To that end, the rules have been changed to exclude some companies that were seen by investors as a means to preserve capital, rather than to take a risk on growth potential.
In addition, the Government has upped annual investment from £1m to £2m for those investing in ‘knowledge intensive’ companies. At the same time, the amount of EIS-linked money that can be accessed by such companies across a twelve month period has been raised to £10m.
Knowledge intensive businesses are already applying to access money under the new rules, but there may further changes in the not too distant future. In particular, the Government is consulting the possibility of EIS Funds that would be set up to serve knowledge intensive businesses.
The good news is that EIS is here to stay, although as the latest rule updates underline, the basic model is likely to be subjected to occasional change, depending on the priorities of the government of the day.
Tax Efficient Investment
Whether or not you you choose to take advantage of EIS and SEIS will depend on your investment priorities. However, if there is an asset you want to buy, it makes sense to do so as tax efficiently as possible. Along with ISAs and VCT Investments, SEIS and EIS tax wrappers provide an opportunity to do just that.
The Route – City wealth club – offers advice on tax efficient investment to all Members.
To find out more, telephone The Route on 020 3141 9040