So, you’ve heard about Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) and want to know what they are and how they can benefit you?
In this article we’ll try to explain and provide understanding on how Enterprise Investment Schemes work and what they can do for you.
Enterprise Investment Schemes can work for private investors in the UK to reduce the risk of investing in startup businesses while making significant savings on tax.
We’re currently living in a time when the returns on savings is very low and do not keep up with the rate of inflation. Meaning you are effectively losing the value of your money in real terms by leaving it in a bank account.
At the same time many small businesses are finding it difficult to raise the money they need to grow their business from retail banks, who are lending less in response to the tough economic times. It is also notoriously difficult for new businesses to find investors because of the risks inherent in all start up companies that most investors are unable or unwilling to take.
To bridge this gap between investors who have capital and businesses who need it the UK Government introduced a tax schemes called the Enterprise Investment Scheme (or EIS) back in 1992, in order to lower the risk of investing money in new and start up businesses.
Investing in a business that has been approved by HMRC for EIS investment can mitigate the risk of loss by offering significant tax rebates against the money invested.
Here’s how it works.
Investors, living and paying tax in the UK, can invest between £500 to £1million in an EIS in any tax year. In return HMRC will give a 30% tax rebate against your investment. This is claimable against the tax you paid in the last tax year, or tax paid or owed in the current tax year. This transfers 30% of the risk in the investment to the UK government.
If the company succeeds and a profit is made on the sale of shares, then this is exempt from capital gains tax on the profit. If an investor has a capital gains tax or inheritance tax liability to pay in the current or next tax year, or have paid any of these taxes in the last 2 years they can claw back or defer tax equivalent to 28% of the capital invested into the EIS business. This effectively transfers up to 58% of the investment risk to the UK government.
If the investment fails investors can offset their loss against their income tax, providing up to a further 28% tax relief if the investors marginal tax relief is 40%.
In short, by offering these generous tax incentives to investors in companies that qualify as EIS, the UK Government is taking a lot of the sting out of an investment that goes wrong whilst improving the return when an EIS company is successful. This makes it much easier for private investors to invest in these companies.
However, any investments in early stage companies, start-ups, EIS or SEIS are broadly only suitable for High Net Worth investors or Sophisticated Investors for whom the tax incentives would be of benefit.
Any investment into an EIS should only be made after very serious consideration has been made as to the potential tax incentives and whether they would apply to the investor’s own personal tax affairs. These are specialist investment products and should only be considered after having sought advice from a financial professional.
Clarion Invest is providing this post for information purposes only and it is not intended to be used as any financial promotion, advice or inducement.