Tax changes announced in Osborne’s Budget are set to increase the popularity of Enterprise Investment Schemes, benefiting investors and small businesses alike.
The changes, which include a marked decrease in Capital Gains Tax, are part of Osborne’s ‘Budget for small businesses’ and may well contribute to making the UK one of the most appealing places for new business startups. But what exactly is EIS, and how can it benefit you?
The Enterprise Investment Scheme was set up by the government in 1994. It was intended to make investment in small businesses ‘less risky’ by providing tax benefits to those who did invest.
Since its inception, the EIS has helped thousands of businesses in the UK grow through investment, and allowed investors to contribute to that small business growth by putting their money into exciting new companies. £1.6 billion was raised by small businesses within the scheme between 2013 and 2014 - a number set to grow significantly this year.
EIS: Who benefits?
The primary beneficiaries of the Enterprise Investment Scheme fall into two main categories; small businesses (investees) and wealthier individuals/companies (investors). By making investment more appealing, Osborne hopes to further support new business growth, particularly amongst businesses which might otherwise be considered too ‘risky’ - which typically includes those which are seeking to innovate and disrupt in their industries.
But the benefits of the EIS don’t stop here. The government recently released data on the regional split of investments and the map below shows which areas of the country achieved investment in 2014:
The map above shows that there was a significant level of investment in London, which may be expected given the level of business growth in that area. The North West is also notable in this map, having received a higher level of investment than the surrounding northern areas. It’s interesting to see the spread of investment, with startups throughout the UK seeking support through the scheme.
Indeed, data from business information site Company Check shows that London had the highest rate of new business incorporation in the period between 2010-2014, but that areas such as Scotland and the North are growing quickly. The latest updates to EIS may well see investments increase in these areas too.
Budget 2016 and the EIS
The EIS is likely to grow in popularity following the Budget 2016 announcement. This is primarily due to a reduction in Capital Gains Tax, down from 28% to 20%, which means businesses will incur lower levels of tax on profits made.
Investors can use EIS as a method of deferring Capital Gains Tax payments, instead investing those gains into small businesses. This means any investors prior to these changes who would otherwise have paid 28% on those gains, will now pay just 20%, even though the gains were made before the Budget announcement.
The new tax regulations will apply to any gains made during the past 36 months. Investors who have made high gains during those 36 months would normally be taxed on those gains at the prevailing Capital Gains Tax (CGT) rate of 28%.
However, they can now choose to invest those gains into EIS instead. When they sell their shares of the businesses in which they’ve invested through the scheme, any profit they make will be taxed on the new rate of 20%. This means EIS gives people who have made high gains in the past 3 years the opportunity to pay a lower rate of Capital Gains Tax on those gains - which therefore saves them money.
How to apply for EIS funding
You can also find out more about equity funding in general here.
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