Key Factors Every Investor Needs to Know About EIS Funds
99.99% of the UK business population consists of small or medium-sized businesses (SMEs) in 2019. They are accounted for about three-fifths of employment and around half of the private sector turnover. For investors looking to invest in SMEs that have the potential to be high-growth in the future, the Enterprise Investment Scheme (EIS) offers some of the most generous tax reliefs. And it includes a tax relief of up to 30%. The EIS Investment scheme was introduced in 1994 to encourage entrepreneurship and promote investment into unlisted businesses to help them grow. Here are some things you need to learn about the EIS.
High-Growth Early Stage Businesses Offer Handsome Tax Reliefs Via EIS
As a seasoned investor or high earner, you realize that your capital is eroded. That’s why tax reliefs have been introduced over the years. To minimize risk and maximize returns, you must invest in a tax-efficient manner. EIS is one of the schemes you must invest in, offering plenty of tax reliefs. These tax reliefs are an income tax relief of up to 30%, no capital gains tax when selling your EIS shares, a capital gains deferral, inheritance tax-free, and loss relief. These aim to offset the risk that you take when you invest in early-stage businesses.
Invest in EIS-Eligible Business Directly or Via a Fund
There are two main ways that you can invest in an EIS-eligible business. First is by investing directly into the company or through an EIS fund, where a fund manager will build your portfolio. The best option will depend on your advantages according to your circumstances and confidence in making investment decisions. When you choose to invest via a fund manager, you will get their expertise, and it also offers diversification. But the expertise comes at a price, which can sometimes cost more than investing in a single company.
Investing Directly into an EIS-Eligible Business Allows for more Visibility & Diversification
One of the key takeaways when you invest through a fund manager is that the investor has less visibility and control over the funds. If you’re an experienced investor, it may seem like a disadvantage. But when you make the investments directly, you get to choose the businesses you want to invest in. That means you get to build your own portfolios around your personal investment goals, pick the companies and sectors you’re interested in, and track the performance of each investment. You can choose what business you want to invest in, and you get to see how they grow. Diversification is key, so you get to choose whatever sector you want to minimize risk.
The Bottomline
Investing in small and medium-sized businesses during the early stages can pose a lot of risks. Thankfully, the tax reliefs are there to offset the risk. At the same time, investing in a diverse range of sectors can lead to minimizing these risks while maximizing your income returns.