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Enterprise Investment Schemes are typically designed by the government to aid and facilitate small and risky businesses to raise funds and equity for their growth. Startups usually do not flourish because of lack of investment from venture capitalists and other investment firms. The EIS was introduced to help budding businesses secure investments while at the same time providing favourable conditions for EIS investors.
EIS investments are a hot trend in the UK market right now, and EIS providers and investment companies, such as IW Capital, facilitate investments into the growing startups and SMEs. The Enterprise Investment Scheme gives a lot of tax incentives to the investors, which makes these investments very lucrative.
The first significant benefit is with income tax refunds where any investment in EIS is claimable by 30% directly from your income tax. Furthermore, if things do not work out, then the loss on the investment is claimable as tax loss in the income statement for the current year. This guarantees that in any case, at least 50% of your investment is safeguarded by the government in terms of tax and tax claims. Capital Gains on EIS investments are incentivised as no capital gains tax is charged on shares attained through EIS investments. Therefore, any profits are tax-free on EIS shares.
Furthermore, capital gains tax can be deferred if reinvested into EIS investments. For example, if a person sells some property on which a capital gains tax liability arises, they can reinvest that amount into EIS which would allow them to defer that liability till the sale of the EIS investment share, whenever that may be. There are distinct inheritance tax advantages for EIS investors as well.
Startups face a lot of issues when trying to raise funding for their initial set up. Even if they can raise some funds or are ready to launch a product or service that has the potential to succeed in the market, startups find it extremely difficult to gather funds in their second round of funding. Fortunately, EIS investments are available for all companies and startups that have been in the market for the past seven years. So startups can easily fund their initial and secondary growth phases through EIS investments.
The most pressing issue that startups face while raising funds for growth is the harsh reality that they have to face in diluting their ownership of the company by giving up equity to raise funding. This funding comes with a lot of pressure and strings attached, which limit the growth and scope of activities that can be done by the company. However, with EIS, this problem is mitigated by limiting the maximum shares that an EIS investor can hold to 30%. This makes sure that majority ownership is never diluted to the point where the original stakeholders are pushed out of the decision making the process. Startups can safely entertain EIS investors without having to forego their majority shareholding.
