Invest in smaller companies using the Enterprise Investment Scheme and access generous tax efficient reliefs.
The Enterprise Investment Scheme (EIS) is a tax-efficient way to invest in the new shares of small businesses, as well as giving much-needed capital to businesses that cannot get funding from traditional methods such as banks and venture capitalists. The UK Government introduced the scheme over 20 years ago to encourage domestic investors to support entrepreneurial UK companies whilst offering significant tax breaks to offset the generic high risk nature of early stage investing. The scheme, in recent years, has been relaxed to allow overseas businesses to qualify as long as they meet the qualifying conditions.
The recent economic downturn has created a very good environment for the right opportunities. These schemes offer investors significant benefits: investors who invest for a minimum period of three years benefit from 30 per cent tax relief as well as exemption from capital gains tax (CGT) and inheritance tax (IHT) which means growth within an EIS qualifying investment is tax-free.
Putting money into an EIS could give you:
- Up to 30% income tax relief on investments up to £1 million in each tax year, as long as the shares are kept for at least three years
- Capital gains tax (CGT) deferral which is eliminated if held at death
- 100% inheritance tax relief after two years, as long as the investor still owns the shares when they die
- Loss relief on any holding that falls in value protecting downside risk to as little as 42% of total investment
- 100% CGT relief after three years thereby giving tax free growth
It’s important to realise that the benefits that investing in an Enterprise Investment Scheme could bring are in exchange for the generic high risk nature of this type of investment. Enterprise Investment Schemes should be viewed as high risk and are not suitable for everyone. Please remember that your capital is at risk, the value of an investment in these products may fall as well as rise and you may not get back the full amount invested. These products will invest in small companies which, by their nature, will be more likely to fluctuate in value and may be more difficult to sell than larger companies.
Remember that a taxed treatment is dependent on individual circumstances and may be subject to change in the future. The availability of tax reliefs also depends on the portfolio companies maintaining their qualifying status. We strongly recommend that you seek independent financial advice before making an investment.
These investments are normally considered as being medium to longer term and more often than not are into private companies. Traditionally they have 2 main exit strategies; a listing on a recognised exchange to enable sale of the equity or a trade sale to another corporate body. Here at Sentient we do not believe that companies should be listed for the sake of it but rather when their progress, revenue and growth justifies a move that should increase investor value significantly as well as offering realistic levels of liquidity in the stock. It should also be remembered that under the EIS rules investors have to hold the shares for a minimum of 3 years in order to qualify for all the tax reliefs available. It is sensible for investors to take a 3-5 year view on these investments as a guide.
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