What A Relief For Small Business Investors

Investors are pumping huge amounts of cash into the Enterprise Investment Scheme (EIS) following the government upping income tax relief.

Investment rocketed after EIS income tax relief jumped from 20% to 30% in April 2011.

The adjustment put EIS on a par with Venture Capital Trusts (VCT).

After Chancellor George Osborne equalised income tax relief on an EIS with VCT, more than £1 billion was ploughed into EIS investments, while VCTs lagged by raising only £325 million.

According to HM Revenue & Customs, in the tax year following the rate tweak, EIS investments doubled from almost £550 million to more than £1 billion.

SEIS raises millions

“Since the tax change, we have seen a growing preference from investors for EIS over VCTs,” said Susan McDonald, chairman of EIS and VCT fund manager Calculus Capital.

“We’ve looked at the figures and this seems to be a strengthening trend that was certainly helped by the Chancellor’s decision to increase the amount of income tax relief.”

The Chancellor has also recently introduced the Seed Enterprise Investment Scheme (SEIS) for start-up businesses unable to raise capital from traditional lending sources.

According to HMRC figures, SEIS has raised millions for more than 1,100 new start businesses.

McDonald’s view is that the extra cash going into SEIS and EIS is not new money but cash diverted from other savings and investments to take advantage of the generous tax breaks offered by the two schemes.

Pension alternative

“VCT investment has been fairly level over the past five years,” she said. “To me, this means that investors are not deciding to put their funds into EIS instead of VCT, but extra money is being raised from other sources,” she said.

“My bet is much of the money would have previously gone into pensions.”

McDonald and other SEIS and EIS fund manager expect more money that would have previously been earmarked for pensions will go into the schemes as a result of this tax year’s annual pension contribution limit of £40,000 and the lifetime allowance limit dropping to £1.25 million.

“We have seen financial advisors suggesting EIS and SEIS as supplementary pensions as the funds can take advantage of tax reliefs that arguably the most tax-efficient investment vehicle available to UK investors,” she said.

“Everyone is recognising the potential for growth EIS and SEIS offer as an increasing number of personal pension restrictions lead investors to look for an alternative home for their money.”

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