Will 2016 be the year of the enterprise investment scheme (EIS) as Britain’s growth companies seek out new sources of funding and its savers look for alternative tax-efficient investments? Well, insiders who follow the EIS closely are certainly expecting big things.
For the uninitiated, the EIS was first launched in 1994, with the hope of kick-starting investment in small unquoted companies, and that continues to be the aim today. To qualify, companies must be worth less than £15m, have fewer than 250 employees, and not be engaged in certain prohibited trades (most strikingly, financial services). Those that meet all the criteria are allowed to offer equity to investors that qualifies for preferential tax treatment. Investors get 30% upfront income tax relief when they first invest – so a £100,000 investment costs only £70,000 – plus tax-free profit, tax relief on losses and inheritance tax perks.
So why, given that the EIS has operated along similar lines for more than 20 years, has its moment to shine now arrived? Well, the first point to make is that investor enthusiasm for the EIS has already leapt upwards. In the 2013-14 tax year, the most recent period for which the Government has published data, investors put more than £1.5bn into growth companies via the EIS, a 40% increase on the previous year.
Since then, however, the stars have aligned in the EIS’s favour. First, more companies are sufficiently confident in their prospects to want to raise growth funding. Second, the broader strength of the alternative finance sector in the UK – spanning everything from crowdfunded loans to private equity and venture capital – has encouraged companies to be more imaginative about where that funding comes from. And third, new technology platforms have sprung up that connect companies in need of funding with investors looking for opportunities to provide it – most fund-raisings on equity crowdfunding platforms, for example, now come with EIS qualifying status.
Now the deal clincher may be about to arrive, in the form of Chancellor of the Exchequer George Osborne. He is widely thought to be planning a cull of tax reliefs for investors in private pension plans, with reforms likely as soon as March’s budget. Most notably, the 40% and 45% tax relief on pension contributions that higher-rate and additional-rate taxpayers currently qualify for look to be under serious threat.
If, as expected, those reliefs do go, it will drive high earners into new tax-efficient retirement planning vehicles – and the EIS, which already providers superior reliefs in many ways will be a major beneficiary.
SOURCE: www.forbes.com
