The Enterprise Investment Scheme (EIS) is a government-backed scheme designed to encourage private investors to invest in small, growing, and early-stage businesses.
The reason the government created the EIS was to help stimulate the UK economy by providing more financial support for new businesses.
It’s estimated that around 80% of all new businesses fail within the first year in the UK. The main reason is due to lack of funding, as obtaining funds through traditional financing and lending options are limited for new businesses.
By incentivising private investment through the EIS, the government has helped small businesses find billions in funding that they would otherwise not be able to secure.
Here’s a look at the benefits of the enterprise investment scheme for both businesses and investors:
Income tax relief for investors
The main incentive are tax reliefs for the investors. Any investor can claim up to 30% income tax relief on investments made to EIS eligible companies up to the amount of £1 million per year.
This means investors are able to claim up to £300,000 in tax reductions in a year providing they have sufficient income tax liability to cover it.
Capital Gains Tax exemptions for investors
There are some stipulations such as holding the share for at least three years, but gains from the EIS investments are free from Capital Gains Tax (CGT).
Investors can also hold shares for a much longer period and accrue their CGT exemptions over a longer period. This will result in huge savings over a number of years compared to investment schemes where CGT is payable.
Increased share value for investors
Small and unproven businesses are among the riskiest in regards to investing, but this doesn’t mean there isn’t a likelihood of an investor seeing their investment value grow.
Investors typically invest in companies they see potential in or are in an industry they know well. They make the best of their judgment and invest in companies that they think will use their funding to accelerate their growth.
This results in the company’s shares being worth more, and the investor’s investment also grows in value.
Funding for small businesses
Small and new businesses need funding to grow, and even just to survive the first few years of trading.
It’s hard to secure funds from banks and other lenders without a history of turning over profit to show they can make the repayments.
Private investors will often invest money in companies that have no track record of success at all. In fact, a lot of businesses looking for funding have not made any revenue at all as they still need to buy crucial items of equipment.
A business does have to sell some equity or shares in return for funding, but this means there are no monthly payments.
Expertise for small businesses
Something that is often overlooked is the expertise, experience, and industry knowledge private investors can offer new businesses.
When an investor makes an equity investment in a business, they’re taking a risk. To make back their investment they need the business to be successful, for this reason, most investors will choose a business they either know well or within an industry they know well.
They will be more than willing to offer any help and expertise they have if it means it’s going to help the business.
Is EIS right for you?
As you can see, when done right, EIS funding is a win-win for both businesses and investors.
The EIS has helped countless businesses thrive when they would have otherwise not been able to continue. As well as helping inventors diversify their investment portfolio and take advantage of helping small businesses grow and see a positive return on their investment.
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