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UK Enterprise Investment Scheme Increasingly Popular

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UK enterprise invest schemeThe United Kingdom’s Enterprise Investment Scheme is a tax-based Venture Capital Scheme designed to help smaller, higher-risk trading companies raise finance. According to recent figures, the scheme encouraged taxpayers to invest almost £2bn in 2014-15.

EIS Tax Relief

Under the EIS, tax relief is provided at 30% of the cost of the shares purchased, to be set against the individual investor's income tax liability for the tax year in which the investment was made. Relief can be claimed up to a maximum of £1m, with a maximum reduction in any one year of up to£300,000. After two years, EIS shares are exempt from inheritance tax (IHT).

Generally, shares must be held for a minimum period of three years from the date the shares were issued or income tax relief will be withdrawn. If the qualifying trade started after the shares were issued, the period is three years from the date operations started.

Investors holding shares for a minimum of three years also enjoy exemption from capital gains tax upon the disposal of the shares. If the shares are disposed of at a loss, investors can elect that the amount of the loss, less any income tax relief given, should be set off against income for the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.

EIS tax relief can only be claimed by individuals who are not “connected” with the company.

Related: The UK: Open For Business – Post Brexit

EIS Funding Hits New Highs

Governments aren’t always successful at picking winners through the tax system, especially if investors feel it is not worth claiming the tax incentives in question. This does not appear to have been the case with the EIS.

Recent data from HM Revenue and Customs shows that 3,265 companies raised a record £1.8bn of funds under the scheme in 2014-15, up 14% on the previous year.

The figures suggest that investors’ appetite for riskier investments has increased. According to Daniel Kiernan, Research Director at advisory service Intelligent Partnership, changes to the UK pension system have strengthened the investment case for tax-efficient investments like EIS.

“What's perhaps more unexpected is the number of advisers who are utilizing EIS for their IHT benefits. Perhaps this reflects the financial planning needs of clients who are concerned about passing on their wealth, but who don't want to give us control of their assets or sacrifice any potential growth just yet."

Earlier this year, Intelligent Partnership released the results of a survey of financial advisers, which showed that 61% expected their use of EIS would increase within the subsequent 12 months. It explained that lower pension limits and a threat to higher tax rate relief were cited as the two biggest drivers for the increasing use of EIS.

Intelligent Partnership said that 96% of the financial advisers it surveyed agreed that the income tax relief available was one of their top three reasons for recommending EIS. 76% also cited IHT mitigation, while 57% explained that portfolio diversification was a primary reason for choosing EIS. Only 10% said the opportunity to invest in a particular sector or business was their primary motivator.

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