Small businesses are an essential component of the UK economy and accounted for 99.3% of all private sector businesses in 2018. The Government wants to encourage investment in this vital part of the economy and offers tax relief on certain kinds of investment. While they are higher-risk investments, small companies also have potential benefits:

  • small companies can have greater growth potential than larger, more established companies
  • many investors look to small companies as a source of growing dividends
  • small companies have a higher rate of mergers and acquisitions, which could mean a large and quick rise in the value of investments.

What schemes and tax treatments are available to small company investors?

Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) is designed to help higher-risk companies attract investment. It works by offering tax reliefs to investors who buy new shares from qualifyingcompanies. However, there are conditions attached to the tax relief.

The company must also:

  • not be controlled by another company
  • not have gross assets over £15 million
  • have fewer than 250 full-time employees.

The company can have subsidiaries but they must all be qualifying subsidiaries. For example, it should own more than half of the ordinary share capital and not be controlled by another company by other means.

The Investor

The shares purchased must be full-risk ordinary shares and purchased in full. Those acquired with a loan will not qualify for relief. To access the available tax relief, the investor must not be connected to the company in question.

Tax Relief

There are 4 tax reliefs available for qualifying shares from qualifying companies:

1. Income tax Income

tax relief at 30% of the cost of the shares is available for the tax year the investmentoccurred. This relief can be claimed up to a maximum of £1,000,000 in investment, which would give a maximum reduction of £300,000. The shares must be held for at least 3 years or the relief will be withdrawn.

2. Capital Gains Tax

For shares that have received income tax relief, any gain on disposal is exempt from capital gains tax. This applies even if the shares were disposed of at a loss, the loss cannot be used in a claim for Capital Gains Tax loss relief and no claim for relief under Section 150 TCGA 1992 can be made.