If you’re an investor looking to diversify your investment portfolio, an investment opportunity worth taking a closer look at is the Enterprise Investment Scheme (EIS).
In this article, we’re going to take a closer look at EIS, how the scheme benefits both businesses and investors, and why it might be a smart investment opportunity for you.
What is the Enterprise Investment Schemes (EIS)?
EIS is a government-backed scheme that was introduced in 1993 and offers tax reliefs for investors investing in startups and small businesses in the UK.
The reason the government introduced the EIS is to primarily help small, new, and growing businesses survive those crucial first few years.
It’s a well-known fact that most new businesses fail within the first few years. The main reason being a lack of funds to support their growth.
New companies find it difficult to raise funds through the traditional avenues like bank loans and financial institutes due to a lack of profitability and a track record of turning over revenue.
For these reasons, raising funds through private investors has long been the best solution. This is where the EIS helps small businesses, the scheme offers tax reliefs for investors to make investing in small businesses more attractive.
What are the tax reliefs for investors?
There are some generous tax reliefs for investors investing in EIS-eligible companies. You should always check with HMRC as there may be some differences based on your individual circumstances, but as a general overview the tax reliefs available are:
- Up to 30% income tax relief that can be applied against either this or last year’s tax bill.
- The ability to defer capital gains made elsewhere.
- No Capital Gains Tax liability if your investment does well, this essentially means tax-free growth.
- You can offset losses if your EIS investment does not work out. This helps to reduce the risk associated with investing in startups and new businesses.
- Inheritance tax is free, provided you hold your EIS investment for at least two years and you still hold it upon death.
Potential risks with EIS investments
EIS investments, much like all investments, are not without risk. Companies that are eligible for the EIS are typically new or small businesses, startups, and other businesses in need of funding to grow and flourish.
This means that most of these companies will either not be generating significant revenue or profits, and may not have a robust business plan in place.
You’re receiving equity in return for your investment, so the upside is that there is the potential to see a good return on your investment if the business does well.
The bottom line is that EIS investments are riskier than investing in an established business. But the tax reliefs are designed to help offset that risk.
Should you invest in an EIS business?
Typical EIS investors are high-net-worth individuals looking to diversify their investment portfolio, while also taking advantage of the tax reliefs on offer with EIS investing.
Whether or not you invest in an EIS eligible business comes down to your own judgement. Most investors look for businesses within industries they have experience in as this also reduces the risk and means they can lend their expertise.
If you’re looking to invest in an early-stage or growing business, it’s certainly a good idea to search for EIS eligible businesses first.
If you can find a business you want to invest in, you’re going to enjoy some huge tax breaks – while also helping a business secure the funds they need to grow. It’s a win-win for businesses and investors.
Hi! I am Eskander Khalid, a professional writer and a researcher. I have years of experiencing digging through the quagmire of the internet and digging pearls from its depths. My reviews, articles and claims are thoroughly verified and authenticated. I love watching football, interacting with my fellow alumni and reading. Being a father to two beautiful girls is my greatest pride and joy.