The tax system is generally seen as a burden for businesses, but occasionally it can be quite the reverse. Somewhere in Somerset, as you read this, there will be a business with a great idea but without the financial means to turn it into reality. And somewhere else in Somerset there will be someone who has both cash and a tax bill they would like to reduce. If only the two could meet, they might well be able to help each other. And if they did, they might get significant help from the tax man.

If the business is a small private company, it may qualify under the Enterprise Investment Scheme (EIS). EIS exists to encourage private investors to acquire shares in small, potentially high risk trading companies: the very businesses that are currently finding bank finance hard to access. Not all businesses qualify (farming, property development and the provision of legal or accountancy services, for example, are excluded) but businesses as diverse as manufacturing, pubs, publishers, film production and even golf courses have used EIS to secure investment.

So if the incentive for the business to use the scheme is access to finance, what is in it to persuade a potential investor to take a risk that a bank wouldn’t take?

Firstly, there is income tax relief of 30% on qualifying investments of up to £500,000 in a tax year (rising to £1 million from 5 April 2012). Secondly, a disposal of the shares (as long as they have been held for at least three years) is free of capital gains tax. Thirdly, after the shares have been held for two years, they escape inheritance tax. Fourthly, if the company fails and the shares become worthless, relief for the capital loss can be claimed either against other capital gains or against income tax (up to and including the 50% rate). And fifthly, if the investor has made a capital gain on an asset in the three years before or one year after the investment, they can “defer” payment of some or all of the gain for as long as they hold the EIS company shares.

EIS is a complex relief, but it can unlock vital investment for businesses that would otherwise fail to find the resources they need - and it can yield some fantastic tax breaks for investors.

For more information, please contact us.