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EIS. Is it still as attractive?

According to HMRC there is an appetite for EIS

23 Sep 2021

EIS (Enterprise Investment Scheme) was introduced in 1994 and SEIS was introduced in 2012/13 following the success of the EIS scheme.

Over the years, there have been various changes in respect of eligibility, amounts that can be raised/invested in such funds and size of eligible companies.

According to annual statistics released by HMRC in May 2021, it appears that the schemes are still very popular. Funding from EIS increased from £1.867bln in 2019/18 to £1.905bln in 2020/19 with 155 more companies receiving funding (4,215 in 2020/19 from 4,060 in 2019/18).

For SEIS, the numbers remained flat at £170m in 2020/19 compared to £171m in 2019/18. The impact of Covid will not be known until the next set of figures is released which is likely to be in May 2022.

There is currently a ‘sunset clause’ in place in relation to income tax relief that is offered by EIS and VCT (Venture Capital Trust) schemes but not the SEIS which means without Government approval, this relief will cease to exist from 6 April 2025. I would expect in a post-Brexit era, the UK Government will almost certainly not let the tax relief offered under the schemes to expire.

So why are EIS investments still popular?

The main appeal is the chance to invest in the newest and most exciting businesses with the added benefit of tax relief.

  • Up to 30% income tax relief, either against this year’s tax bill, or last year’s via a carry back facililty
  • Ability to defer capital gains made elsewhere, by investing these in an EIS
  • No capital gains tax if the investment does well
  • Loss relief – possibility of offsetting losses against income or capital gains tax
  • Inheritance tax free, provided the EIS is held for at least two years and it is held at death

Risks of EIS investments

  • Inherently more risky with a higher change of failure
  • Liquidity – as these are largely investments in unquoted companies, it can be difficult to exit

EIS in tax planning

On balance, for a higher rate taxpayer and/or those who are affected by reduced pension contributions and the Lifetime Allowance, there is very little else in terms of tax efficiencies, so I suspect EIS investing will remain attractive for people in these categories. For a 45% tax payer, the maximum effective loss could be as little as 38.5p for every £1 invested but on the other hand, the gains would not be capped nor would they be subject to tax so it still remains very attractive.

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