Out-Law / Your Daily Need-To-Know

Enterprise investment limit to double after European approval

27 Sep 2011, 11:33 am

Investors will save an extra 10% on income tax when investing in high growth start up companies after the European Commission approved a Treasury plan. The limit to investments that qualify for relief will double from next April.

Investors already qualified for 20% tax relief on investments in high growth start ups through the enterprise investment scheme (EIS) as long as the sums did not exceed £500,000. That saving will rise to 30%, backdated to 6 April 2011, and the investment limit will increase to £1 million next year.

Companies looking to raise funds by issuing shares will now be able to raise up to £10m in any 12 month period from 6 April 2012. The relief has also been extended to companies with fewer than 250 employees and gross assets of up to £15 million before the share issue.

The existing scheme should be simplified to encourage investors to make what may be seen as more risky choices, according to Kate Featherstone, a tax law expert at Pinsent Masons, the law firm behind Out-Law.com. A Treasury consultation on proposed reforms to the system will close on 28 September.

EIS was established in the 1990s to encourage individuals to invest in smaller, high-risk trading companies by offering tax reliefs to those who purchased new shares in those companies. Tax savings are available where a qualifying company issues shares in order to raise money for a qualifying business activity.

The relief consists of an initial 30% income tax saving where the money is used to purchase shares. Providing the shares are held for at least three years after the date of issue of the date the company begins to trade, the shareholder will also be exempt from capital gains tax when the shares are disposed of.

Despite accounting for only 6% of businesses in the UK which employ more than 10 people, over half of all jobs created by businesses employing more than 10 people in the past three years were created by the high growth companies targeted by EIS, according to Treasury figures.

Together with the Venture Capital Trusts scheme, EIS raised over £500million in investment for over 1,800 businesses in 2008-09 the most recent figures said.

George Osborne said that the changes would help make the UK "the best place to start, finance and grow a business".

"These changes will give a bigger tax break to those who take risks for growth and jobs in Britain by investing in the small companies that have the potential to be fast growing," he said.