EIS – Importance to UK Angel Investments
The Enterprise Investment Scheme (EIS) is one of those rare Government incentives that actually works. It is very important that any UK based start-up trying to raise funds from Angel Investors understands EIS as it is a key requirement for many Angels, myself included.
What is EIS? Details are on the HMRC website, but in summary it provides tax relief for an investor investing in an EIS qualified company, subject to a certain number of rules. In practice what this means is that for each £100 I invest in an EIS qualified company I get £20 back off my income tax bill, a significant return. Furthermore, provided I hold the shares for 3 years, then, should the company be successful and I later sell my shares, any gain I make will be free of Capital Gains Tax (CGT) – today that saves me 40% on exit! Finally, in summary terms, should the investment not be successful and the company fails I can write the loss off against income tax (not just against Capital Gains).
If you’re running a start-up business I hope you can see why understanding EIS is so essential when asking an Angel to invest – the EIS scheme is a real incentive for investment. There are rules associated with EIS and it is important that you understand them; for example in the standard Shareholder’s Agreement I use for investments it is a condition that the company does nothing to prejudice its EIS status.
Is everything about EIS good? Inevitably not; there are plenty of changes that would make it even better in terms of encouraging greater investment in UK businesses. Before the last election in May I wrote a guest blog for startups.co.uk with my 3 Angel wishes for a new Government, included in which was a request for greater EIS incentives. This subject was also discussed at length at the recent Seedsummit event sponsored by Seedcamp on 26th January at Techhub. Some of the changes suggested include:
- Allowing convertible loans (which include conversion discounts and interest) to be allowed for EIS
- Similarly enabling preference shares to be allowable
- (and my main gripe) allow a greater percentage holding to qualify for EIS (currently limited to 30%)
It’ll be interesting to see whether there is any movement on this or other aspects of EIS in the forthcoming budget on March 23rd.
Posted on February 28, 2011, in Angel Investing, Entrepreneurship, Start-Ups and tagged Angel Investor, EIS, Enterprise Investment Scheme, Raising finance, Start-ups. Bookmark the permalink. 7 Comments.