High-net-worth individuals seeking sizeable returns on their capital might wish to ponder the multiple advantages to the EIS as outlined below. Embryonic companies seeking to accelerate their growth, meanwhile, may find the section below, about attracting investment, useful.
Adam Bannister, Managing Editor of BusinessesForSale.com gives us five reasons to use EIS
1. Income tax relief
Under the IES investors can claim up to 30% relief on their income tax up to a maximum of £1m per tax year.
The minimum investment required is just £500, the maximum £500,000. This allowance can be offset against income tax owed for the previous tax year.
To lock investors in for the long haul, however, shares must be held for at least three years from their time of issue.
2. CGT relief
Capital gains tax is not payable on the disposal of qualifying shares once they have been held for three years, providing the investor qualified for the income tax relief provision and had not withdrawn on those shares.
3. Inheritance tax relief (IHT)
Qualifying EIS shares are also liberated from inheritance tax after two years. This potentially reduces IHT liability to zero.
4. CGT deferral relief
CGT deferral relief allows investors to roll over CGT that is up to three years’ old into EIS companies and defer it indefinitely. Payment of a chargeable capital gain can be deferred if invested in EIS qualifying shares within four years of the capital gain being made.
So long as EIS shares are held, CGT deferral is potentially limitless.
5. Loss relief
Should EIS shares be disposed of for a loss – accounting for the effect of income tax relief – the loss can be offset against the investor’s income tax, in the year the loss occurred or the year before, or against their CGT liability.
In other words, the impact of any loss sustained through the EIS is blunted.
Small businesses must do appropriate groundwork to give themselves the best chance of securing significant investment. Making prospective business angels aware of the aforementioned, multiple benefits of the EIS is certainly a good start – but there’s more you must do to secure funding.
1. Personal relationships
Securing funding will really test your people skills – and indeed those of your professional advisers. A well-connected accountant can be invaluable.
While it can be challenging to secure a first tranche of funding, using your initial investors’ clout to find others can quickly build momentum. It’s a herd mentality: an investment naturally seems safer if other investors are always on board.
Harness every relevant social connection you can think of. Recommendations from friends or trusted business professionals are obvious paths to funding, but you’d be surprised how an exchange of business cards months, or even years, before might yield a promising lead.
Many small-business owners underestimate the power of their existing networks, with trusted suppliers, customers, and even service providers such as accountants and lawyers providing potential routes to influential investors.
When it comes to pitching your idea, your opening gambit is vital – so begin with the most compelling part of your proposal. And final impressions arguably count as much as first impressions, so aim to finish as strongly as you began.
Pitchers should rehearse more than just the initial presentation outlining the concept and its merits; they should also arrive armed with the detail they didn’t have time to cover in the presentation. Should the investor ask further questions at the end – as they probably will – then you need to be prepared.
A sound business plan is one thing, but investors will also want proof that there’s a team in place capable of delivering on your promises. Proving that your staff are accomplished, with the skills and experience to make good on your vision forms another pillar of your bid for funding.
Against a background of continuing scarcity where credit is concerned, the Enterprise Investment Scheme regularly delivers vital funding to small firms with the potential to reap large returns rapidly.
Providing you cast your net wide for investment and put forward a compelling case for backing your company, the Enterprise Investment Scheme provides a powerful incentive for business-angel funding.