Generous tax incentives for investing in higher risk enterprises

With the cost of living rising steeply and taxation at its highest level for decades, tax breaks are welcome, particularly for those looking to invest their money in business.

The Enterprise Investment Scheme (EIS) allows a company to raise money from investors to help grow its business. The EIS stipulates that those receiving investment under the scheme must use it to grow their business.

It was designed to encourage individual investors to buy shares in higher-risk companies by offering generous tax reliefs to those who invest.

Higher returns potential

Investing in less established businesses may carry greater risk, but there is the potential for higher returns and the tax relief available can minimise any loss should the worst happen.

Under EIS, a business can raise up to £5 million each year, and a maximum of £12 million in the company’s lifetime.

There are different rules for knowledge-intensive companies that carry out a significant amount of research, development or innovation.  It is a complicated area, so it is important to get the correct advice from a tax specialist.

To be eligible, a business must be within seven years of its first commercial sale, not have gross assets worth more than £15m before shares and have less than 250 full-time employees.

Income tax relief

Income tax relief is generous with this scheme and investors can claim relief for a maximum annual investment of £1 million, or £2 million if they have invested in a knowledge-intensive company.

They can claim for up to 30 per cent of the investment, meaning that they could receive up to £300,000 tax relief a year ­– or £600,000 for investments in knowledge-intensive companies. This is one of the most generous tax relief schemes currently on offer in the UK.

Protection from losses

The EIS scheme provides attractive loss relief at the investor’s marginal tax rate.

When this loss relief is combined with the income tax relief received when investing in an EIS eligible company, it greatly reduces the amount of capital at risk.

Relief with Capital Gains Tax

Returns on most non-EIS investments will be liable for CGT above the CGT-free personal allowance, but providing all conditions are met when investing in an EIS scheme, all growth in value is exempt from CGT. This means investors can achieve a greater net profit, while saving their personal allowance for other investments.

For help and advice on related matters please contact our expert team.