Business angels injected more than £1 billion cash as equity stakes in new businesses under the Enterprise Investment Scheme (EIS), according to new statistics.
Total investment for the 2012 tax year – the latest year figures are available for – was £1.02 billion.
This was double the figure achieved 12 months earlier, when investors pledged £545 million, says HM Revenue & Customs (HMRC).
EIS opened for business 20 years ago, but has only recently taken off on a large scale thanks to banks more or less pulling out of financing new and fledgling business, says investment web site seis.co.uk.
The big uptake in EIS investment follows entrepreneurs switching from debt to equity funding for their projects in line with the drop in bank involvement with businesses.
Comparing SEIS and EIS
Another trigger for the improved investment figures was a Chancellor George Osborne lifting the limits on EIS equity stakes to £5 million in April 2012.
According to SEIS.co.uk, this enabled companies and investors to strike better deals.
While upping the EIS limits to encourage bigger investments, the Chancellor also introduced the Seed Enterprise Investment Scheme (SEIS) for start-up companies.
“SEIS offers tax breaks for investors putting up to £150,000 equity over two or more tax years into a start-up business,” the website explains, “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.”
HMRC calculates 20,000 firms have taken advantage of about £9.5 billion of funding under the EIS years.
Points to watch for investors
According to SEIS.co.uk, “Both schemes are working well for entrepreneurs. Around 1,500 firms joined EIS last year – an increase of more than 40% on 2011.
“At the same time about 1,250 start-up companies had benefited from almost 4,000 applications to join SEIS.”
To qualify for the generous tax breaks, EIS and SEIS investors must hold their shares for three years.
EIS investments qualify for a 30% tax relief, while SEIS offers income tax and capital gains tax reliefs for participants.
For the unwary investor, two points need considering.
Look at an exit strategy from the start because EIS and SEIS shares are rarely publicly traded and may be difficult to dispose of, and the tax breaks are only available to UK residents, not expats or investors based overseas.