It was under John Major’s conservative government in 1994 that the Enterprise Investment Scheme was introduced.
Since then, the scheme has seen a number of amendments, but always with clear indications from the government holding office that this form of private investment is being encouraged.
The latest changes, put in place by chancellor George Osborne in his 2011 Budget speech, saw the income tax relief from those invested in EIS increase from 20 per cent to 30 per cent starting that very same year, the size limit of eligible companies increase from 50 to 250 employees and from £7m to £15m in gross assets from April 2012, and the investible amount was doubled to £1m.
The changes also saw an increase in the amount of capital a qualifying business can raise in a year from £2m to £5m.
Simon Ruthers, private client manager at Oxford Capital, explains: “EIS can provide a less demanding IHT exemption for those investors who wish to take advantage of the Business Property Relief rules, which only require an investor or their spouse to survive two years from investment, rather than the standard seven years necessary with gifts or trusts.”
The inheritance tax (IHT) benefits for the EIS fall under Business Property Relief (BPR), which provides 100 per cent exemption from the tax once the holding has passed the two year mark.
But a survey carried out by Rockpool Investments among the adviser community found that, owing to the generous income tax relief, many leave using these products until closer to the January 31 self-assessment tax deadline.
According to Rockpool Investments, self-assessment tax payers have to make a payment on account to HMRC on January 31 for the current tax year, which is calculated by HMRC based on the taxpayer’s tax bill for the previous tax year.
If the taxpayer can show that they have made a qualifying EIS investment in the current tax year, HMRC will reduce the payment on account due on January 31.
Matt Taylor, managing partner of Rockpool Investments, explains: “Enterprise investments that qualify for EIS relief are a very powerful way to reduce clients’ tax payments.
“The reliefs available through EIS are so generous that it is a genuine surprise to me that more clients and advisers don’t make use of them, particularly since the scheme was made even more favourable to investors in April 2012.”
He adds: “The culture of making EIS investments in the last quarter of the tax year is deeply embedded for many providers as well as advisers, but there are very good reasons to recommend that clients invest at other times of the year.”
EIS doesn’t come without its risks. The investments are generally classed as ‘higher risk’ because traditionally the scheme provided funding for very small companies. Since the rules surrounding the EIS were widened to allow investments in more established companies, this risk has lessened slightly.
