Private Investors Pump £1 Billion Into EIS Companies

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Just over a £1 billion was raised for financing business by the Enterprise Investment Scheme (EIS), according to new official figures.

The amount for the year ending March 2012 was double the previous year’s total – £1.02 billion compared with £545 million in 2011, says HM Revenue & Customs (HMRC).

EIS has been running for 20 years, but uptake has improved in recent years as the government upgraded tax breaks and banks more or less closed the doors on debt funding for businesses after the credit crisis.

The aim was to offer an equity stake alternative to businesses seeking finance.

When EIS started, investors could input up to £1 million in cash during a tax year for a tax relief of 30%.

Tax breaks upgraded

Chancellor George Osborne upgraded EIS in 2012, when he announced the start of the Seed Enterprise Investment Scheme (SEIS).

SEIS offers tax breaks for investors putting up to £150,000 equity over two or more tax years into a start-up business. Investors can take advantage of income and capital gains tax reliefs to reduce the risk of involvement in a new company without any trading history.

EIS was revamped by raising the investment limit to £5 million with the intention of porting growing businesses needing further investment from SEIS into EIS.

In announcing the figures, HMRC reckoned EIS had helped 20,000 firms raise around £9.5 billion funding in 20 years.

Around 1,500 firms joined the EIS in the year – an increase of more than 40% on 2011.

Exit strategy

Another recent announcement said about 1,250 start-up companies had benefitted from almost 4,000 applications to join the scheme.

Both EIS and SEIS are designed to offer entrepreneurs direct access to investment cash.

Firms favour the schemes as any money raised is treated as an equity capital injection rather than a debt investment requiring capital and interest repayments on a bank loan.

This reduces overheads for the company and makes more cash available for business activities.

Investors must hold shares in both an EIS and SEIS for three years to qualify for tax breaks.

One point for investors to watch is EIS and SEIS firms are rarely listed on the stock market, so an exit strategy involving a sale of shares or flotation should be considered at the start of the investment.

Also, the tax breaks are only offered to UK resident taxpayers, so the returns on investment for expats or overseas investors may not be so good.

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