The government has introduced tax breaks through the Enterprise Investment Scheme (EIS) to encourage those considering making business investments to go ahead with a greater level of confidence. It presents a buffer against potential losses and is proving a popular scheme with entrepreneurial investors.
If you’re among them, with cash to invest and a keen eye for a healthy return, you will want to consider the following points.
Not all business ventures qualify for inclusion in the EIS. Amongst those excluded are:
Most other types of business will qualify for inclusion in the scheme on the understanding that the company intends to develop and grow its business interest over the long term.
Companies permitted to raise more funds through the scheme include knowledge-intensive companies such as those with a higher research and development spend, or the creation of intellectual property. Most companies within the scheme would be considered risky ventures, so there is also the understanding that investors are taking considerable risks, realising they could lose more of their invested capital than they get back from other returns from the investment.
Recent changes to the EIS scheme now demand that a new ‘risk to capital’ test is performed when new shares are issued. It will establish that the investment is risky enough to deserve extra tax relief and will take into account the share prospectus along with any publicity material.
The risk and return refers specifically to investors, with loss referring to some or all of the invested capital and return being the net investment return. This takes into account growth of capital and the value of the EIS relief obtained.
In order to benefit the companies most in need of investment, certain criteria must be met.
For companies that do qualify, EIS offers a unique opportunity to raise finances for either start-up or expansion.
As well as the initial qualifying criteria a company must meet in order to benefit from the scheme, there are a few other stipulations. These conditions must be met throughout the 3-year period. The company must:
There are also certain criteria regarding who can invest under the scheme:
The scheme recognises that not all investors wish to pour all their available funds into one company. Alternatives exist to help potential investors spread their risk by subscribing to an EIS approved investment fund or Venture Capital Trust (VCT).
Approved investment funds employ a fund manager to collate the total sum from a number of subscribers to the fund. The subscriber’s money is then allocated, by the manager, between a number of different companies.
It’s possible for the investor to realise a total deferral and tax saving of 60% of the initial investment. This is achieved through the following incentives:
“Great service; reliable, friendly, knowledgeable and competent.”
The Enterprise Investment Scheme offers potential investors the opportunity to facilitate the growth and development of qualifying companies. In addition, interested investors can get involved in the running of the business and receive appropriate payment for their work.
If this sounds like something you’d be interested in getting involved with, we’re here to offer more definitive advice regarding investment opportunities and some of the finer details with regard to qualifying industries, specific risks, returns and tax reliefs.
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