While the higher risk of these businesses has traditionally made EIS a less appealing option, the tax incentives have made it an appealing option for those seeking to diversify their portfolios.
Currently, these are the tax incentives on offer:
- Income tax relief: 50 per cent on SEIS investments up to £200,000 in a single tax year, and 30 per cent on EIS investments up to £1 million in a single tax year, or £2mn if at least £1mn is invested in knowledge-intensive companies.
- Any profits that come from the sale of SEIS and EIS shares after three years are exempt from Capital Gains Tax.
- Inheritance tax does not apply to SEIS and EIS shares that are held for at least two years.
- Loss relief: If SEIS and EIS shares are sold at a loss, investors can offset the loss against their Capital Gains Tax.
Ensuring investors are aware of these tax incentives, which as noted are designed to offset the risk profile of early-stage-business investments, is crucial.
The schemes will never achieve their full potential to encourage private investment into SMEs if they are not well understood.
Increasing understanding and awareness will go a long way towards unlocking the maximum value EIS has to offer. But there are further steps that policymakers could consider in levelling up EIS:
- Making EIS more attractive to investors through greater flexibility in investment options or reduced risk.
- Increasing accessibility for British businesses by widening eligibility criteria.
- Leveraging EIS to encourage greater investment into secondary markets.
Exploring demand-side reforms could also enhance the efficacy of these schemes, democratising access for consumers.
Initiatives like building mechanisms for businesses to report investments to HMRC on behalf of their investors would benefit retail investors, ensuring easier obtainment of tax relief by streamlining the process.
Additionally, better links between tax vehicles such as Isas and the EIS and SEISschemes could provide simpler deployment methods for investors, fostering greater participation in SME investment.
More solutions like the Innovative Finance Isa (IFISA) – which was introduced in 2016 to encourage investment into the P2P lending market – are worth consideration, helping bring EIS investment more into the mainstream by aligning their attractive tax benefits with those of Isas.
EIS is a proven asset in increasing investment volume, so we must be creative and diligent in constantly improving its framework.
The benefits for British business
The past three decades have been a tumultuous time for British business and related investment, including multiple economic and global crises, Britain’s rise as a tech hub, and the challenges of today.
Ultimately, how successful the EIS/SEIS framework can be hinges upon its ability to catalyse a virtuous cycle of investment, innovation, and economic prosperity.
The latest figures show that the scheme remains active, but the broader landscape suggests that its full potential has not yet been reached.
It’s the job of policymakers to ensure that investment in British business is as accessible and appealing as possible.
By embracing a spirit of innovation and collaboration, we can unleash the full transformative power of these initiatives, breathing new life into a startup ecosystem that is currently stalling.
Sam Martin is chief executive of Peckwater Brands
