Anna Slemmings on tracing the trajectory of the Enterprise Investment Scheme in FundWeb
Last week’s online tax return deadline means that this is the time of year when ways of mitigating tax liability is at the forefront of many investors’ minds.
After their Isas and pensions, one of the increasingly appealing tax efficient investment options available to them is the Enterprise Investment Scheme (EIS).
The scheme was actually launched in 1994, but it has really come into the fore in recent years. As this asset class begins to become mainstream, it is interesting to see why it was created and how it has grown.
The history of EIS
The scheme was created in the 1993-94 tax year to replace the existing Business Expansion Scheme, which in turn had sprung from the Business Start-up Scheme. All of which shared a common purpose: to encourage private investors to provide capital for growing UK unquoted companies.
This means the government has been trying to encourage private investment into small and medium-sized enterprises since 1981.
Then, as now, it was difficult for entrepreneurs of unprofitable businesses to secure lending from institutions. The government turned to private investors to support small business, using tax breaks as the carrot.
Now in its eleventh year, EIS has proved its worth.
According to recent HM Revenue & Customs figures more than 21,000 companies have received investment through EIS and over £10.7 billion of funds have been raised. This may go some way to explaining why EIS has proved popular with successive governments.
It was introduced by a Conservative government and it proved resilient through 13 years of Labour, only to be expanded and improved under the coalition government in 2012.
This expansion was designed to increase the number of businesses that could benefit from EIS and to make the scheme even more attractive to private investors.
The headline change in 2012 was that now bigger, more established, companies could qualify for EIS funding. Companies could now have up to 250 full-time employees – up from 50 – and up to £15m of gross assets compared with the previous limit of £7m.
The amount that both companies and individuals could raise or invest grew as well. The annual limit of EIS funding for companies more than doubled to £5m, while individuals can now invest up to £1m.
However, the most notable change from the 2012 budget was the tax relief jumped from 20 to 30 per cent.
That Budget also introduced the Seed Enterprise Investment Scheme, with more attractive tax breaks for investing in riskier companies. With SEIS the government offers 50 per cent income tax relief on investments up to £100,000.
Investors can claim 30 per cent of investments up to £1m each year.
EIS losses can be offset against income or capital gains tax. There is also the potential for loss relief against income for losses arising on disposal of shares where deferral relief only was claimed (subject to an overall cap on income tax reliefs).
Tax-free capital gains on the EIS investment (if held for minimum three years).
Unlimited deferral of any capital gains tax on gains made in the three years prior to and one year after investing the gain in EIS qualifying investments.
Relief for any capital losses which may be offset against other capital gains.
Total relief from inheritance tax (as long as the investment is for two years).