5 things investors need to know about EIS investments in 2020
In 2019, 99.9% of the UK business population was made up of small and medium-sized businesses, they also accounted for three fifths of the employment and around half of the turnover of the private sector.
For investors looking to invest into high-growth, early-stage SMEs today, the Enterprise Investment Scheme (EIS) offers some of the most generous tax reliefs, including income tax relief of up to 30%.
The scheme was introduced by the UK government in 1994 in order to stimulate entrepreneurship and encourage investment into unlisted businesses, helping them to raise funds and grow.
Since its inception, 31,365 individual companies have received investment through EIS, with approximately £22 billion raised.
Investing into SMEs is beneficial, of course, for the business, as well as the investor – who could potentially receive high target returns and attractive tax reliefs. But – particularly during the current COVID-19 pandemic – supporting small businesses is also an impact investment, aiding in job creation and boosting the economy.
Here are five things investors need to know about EIS investments in 2020.
1. The tax reliefs available via EIS are some of the most generous for investing into high-growth, early-stage businesses
If you’re an experienced investor or high earner, you may feel that your capital is being eroded, as cuts to pension allowances and some forms of tax relief have been introduced over the years.
In order to maximise returns and minimise risk, investing in a tax-efficient manner is crucial.
The tax reliefs available when investing into an EIS-eligible business include:
- Income tax relief of up to 30%. This is applicable on a maximum annual investment of £1 million, or £2 million if at least £1 million is invested into knowledge-intensive companies.
- No capital gains tax when selling EIS shares. If you have held the shares for at least three years, claimed income tax relief and the company you invested into still qualifies.
- Capital gains deferral. If you use a gain from the sale of any asset to make an investment into an EIS-eligible company, you do not have to pay capital gains tax immediately.
- Inheritance tax-free. After you have held your EIS investment for two years, it becomes inheritance tax-free.
- Loss relief. If your EIS investment is realised at a loss, it can be offset against the same or previous year’s income tax, or the same year’s capital gains tax.
Investing into early-stage businesses is high risk, and the tax reliefs offered by EIS aim to offset the extra risks associated with investments of this type.
2. You can invest into EIS-eligible businesses direct or via a fund
There are two ways of investing into an EIS-eligible investment opportunity: by investing directly into a single company or through an EIS fund where a fund manager builds your portfolio.
Each has their own advantages and disadvantages, and the best option for you will be dependent on your circumstances and confidence in making investment decisions.
Investing via an EIS fund offers diversification, and you can also benefit from the fund manager’s expertise. However, this expertise comes at a price, meaning it could cost more than investing into a single company.
As well as this, when investing through a fund, you have significantly less control over where your money is invested when compared to investing directly – where you can choose EIS-eligible investment opportunities based on your circumstances but also your preferences.
3. The ability to invest directly into EIS-eligible businesses allows for greater visibility, control and diversification
As previously mentioned, investing into an EIS fund could offer an investor less visibility and control over where their funds are invested. For experienced investors, this may be seen as a disadvantage.
However, when investing directly, investors are able to choose the individual businesses they invest in – meaning they can build a portfolio around their personal investment goals, select companies and sectors they’re interested in and track the performance of each investment.
For example, an investor who is particularly interested in supporting the growing fintech sector and also has a focus on climate change could invest into a start-up challenger bank along with a cleantech company.
This is where diversification is key – as investors should spread their capital across a range of sectors and businesses to aid in minimising risk.
And to make the process easier, platforms such as Growth Capital Ventures’ (GCV) co-investment platform bring a selection of high-quality, EIS-eligible investment opportunities together in one place.
4. There are a wide range of EIS-eligible investments to choose from
There are EIS-eligible companies across a broad range of sectors and industries, but to become EIS-eligible businesses must:
- Be unquoted
- Have less than 250 full-time employees
- Have gross assets of less than £15 million
- Be within seven years of their first commercial sale
5. Investment into tech startups is more important than ever in the wake of COVID-19, and there are a variety of EIS-eligible options
Over the years, technology has become increasingly important – with trade body Tech Nation stating that there was a record £10.1 million of annual investment in the UK tech sector in 2019.
And in the wake of COVID-19, tech companies – and the tech sector’s impact on the UK economy – are more important than ever.
The ‘new normal’ has seen digital solutions become crucial, as people and businesses have to significantly reduce contact in the physical world.
This has seen the tech sector perform well during the current pandemic, one of the few parts of the UK’s private sector to do so.
Increased demand means that many tech SMEs are looking for investment to scale, and it opens gaps in the market for new, high-growth businesses.
Technology’s importance in the bounce-back of the UK’s economy is also reiterated as the government devises plans to boost the fintech sector in particular.
GCV have facilitated over £45 million of investment into high-growth tech businesses – including QikServe, a digital order and payment solution for the hospitality sector, and Intelligence Fusion, a SaaS provider of geopolitical risk management solutions for global businesses – and contributed to the creation of over 600 jobs in the past five years.
And GCV are pleased to announce the launch of their latest EIS-eligible investment round, now open to new and existing private investors.
Investment from the current round will enable GCV to support 30 high-growth startups and create hundreds of new tech jobs within the North East through its venture builder unit, G-Labs. It will also allow GCV to increase internal headcount from 22 to 40 in the next 12 to 24 months.
Now overfunded, having exceeded the initial target of £1m, there is still time for new and existing investors to participate in this round before the deadline on Monday 30th November.
Craig Peterson, Co-Founder and Chief Operating Officer at GCV, said:
Over the past five years we have been on a mission to support entrepreneurs and innovators to build and launch high-growth businesses that transform industries.
The fundraise will not only increase our capacity with further quality hires and expand our venture builder arm but in turn will enable the creation and scaling of the UK’s next wave of innovative tech start-ups.
As consumers and businesses are relying more on technology as a result of COVID-19, we feel this investment comes at the right time to combine capital and intensive support to build better, more sustainable businesses.