Investing in startups is a high-risk, high-reward endeavour that has the potential to pay off handsomely for savvy investors. However, keeping up with the latest trends and regulations in the industry can be a daunting task.
According to Gov.UK, there has been a steady increase in EIS since 2010. They also report that fund managers are more promoted and involved. By large, it could be due to sustained historically low-interest rates.
One such area that investors need to pay attention to is the Enterprise Investment Scheme (EIS) updates. This article will explore the recent EIS updates that investors should know, among other essential aspects.
A Brief Overview
The UK government-backed scheme provides tax relief for investors who invest in small and medium-sized enterprises (SMEs). Below are some incentives for investors who provide much-needed funding to these high-risk ventures:
- Investing can happen directly or through a fund.
- There are a variety of EIS-eligible options for investors.
- Direct investments offer more visibility, diversification, and control.
- Tax reliefs for fast-growing, new EIS businesses are generous.
Understanding why EIS investments draw investors already gives more insight into its benefits. However, let’s dive into the recent EIS updates that investors should be aware of:
- Increased Investment Limits
With this being one of the most significant updates, the increased investment limits could affect the investor-business relationship. As of the 2021/22 tax year, investors can invest up to £2 million per tax year in qualifying companies. This figure is up from the previous limit of £1 million.
Furthermore, the increase in investment limits provides investors with greater flexibility and the ability to invest more money in promising startups. More importantly, EIS funds could support a growing startup with a more considerable contribution. That may be one of the critical factors for their early success.
- Changes To The Age Of Qualifying Companies
Another update to the EIS that investors should be aware of is the changes to the age of qualifying companies. Previously, companies had to be no more than seven years old to qualify for EIS funding.
However, as of the 2020/21 tax year, this age limit has been extended to ten years, giving investors more opportunities to invest in established startups. It means good news for older startups and investors as the risks of failure could decrease with the company’s age.
- New Rules Around Knowledge-Intensive Companies
The UK government has introduced new rules around knowledge-intensive companies. Its design encourages investment in startups conducting research and development (R&D) activities. These companies can now receive up to £20 million in EIS funding over their lifetime.
With this figure doubling from the previous limit of £10 million, investors can now plough more funds into this sector. R&D is, after all, the promise of a better future for all, including the investors.
- Changes To The EIS Carry-Back Rules
Finally, investors should be aware of the changes to the EIS carry-back rules. Before, investors could only carry back EIS investments to the previous tax year. However, as of the 2020/21 tax year, investors can now carry it back to the last two tax years, providing them greater flexibility and the ability to offset losses against previous gains.
Even with all the new gains for investors, some risks still exist. Investments are never without risk. But mitigating them and focusing on growth and development could offset those risks.
Risks For EIS Investors
Long-time investors could recognize the most common risks they could face. Not only for EIS investments but also for any of their other endeavours. Here are some of these to keep in mind:
- Liquidity Risk: Investors need to convert their investments into cash. If it has limited potential, it may not make good business sense to provide funds to the chosen business.
- Investment Risk: Investors should know that they could suffer losses during any investment. EIS is known for their high investment risk, meaning investors should consider all their options carefully.
- Tax Risk: Consider the possibility that tax reliefs could differ from when the investor first decided to invest.
- Exit Risk: For various reasons, investors could choose to exit their investments. An exit from an EIS investment may only be possible when the company lists on a well-known stock exchange, sells its shares to another private investor, or undergoes a voluntary liquidation.
Although investments could each have specific risks, investors should evaluate what this means for them individually. Additionally, identifying the potential risks and deciding if the investor can handle them could ensure tremendous success.
The Final Word
The recent updates to the EIS provide investors with more significant opportunities to invest in promising startups and receive tax relief. By keeping up to date with the latest changes to the EIS, investors can take advantage of these opportunities and potentially earn significant returns on their investments.
If you’re interested in investing in startups through the EIS, it’s essential to consult with a financial advisor to determine if it’s the right investment strategy for you.