Tax reliefs play a vitally important role in facilitating private investment into British businesses, according to a government-commissioned survey.
The Government asked market research firm Ipsos Mori to conduct a study into why investors funded businesses through Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS). It found that the overwhelming majority (79%) did so in order to benefit from the Income Tax relief on offer through these initiatives.
The EIS tax relief currently offers 30% on income tax, meaning if £1 million is invested into a business that qualifies through the scheme, £300,000 can be claimed off the investor’s tax bill. Another important benefit of the EIS is that it is exempt from Capital Gains Tax, with 54% of investors who have used the scheme saying this was a key factor in them choosing to do so.
Evidently, tax breaks are a major lure for investors. This, in turn, demonstrates the importance of government-backed investment schemes, in which the State is able to provide such incentives.
The findings underline the same points that were recently uncovered by IW Capital’s Taxpayer Sentiment Report 2016. The research, which can be downloaded here, looked into how much income tax investors in the UK pay and, moreover, it examined investors’ sentiment towards the EIS.
Our study yielded clear results. Firstly, we found that UK investors who have more than £40,000 worth of investments currently pay an average of £26,058 in Income Tax – this is over four times the national average of £5,590. Of this same group of serious investors, the majority (54%) revealed that they were considering investment through the EIS for the 2016/17 tax year.
With investors shouldering a heavy income tax burden – and because there are very few remaining government incentives remaining to encourage much-needed investment into Britain’s private sector – both IW Capital’s and the Government’s own research have highlighted the importance of protecting the EIS in both the short and long term.
Sarah Wadham, the Director General of the EIS Association (EISA), a not-for-profit organisation that exists to aid the provision of capital investment into SMEs through the EIS, offered her expert insights in our Taxpayer Sentiment Report 2016 in which she emphasised this point. She explained: “People are always conscious of their tax bill, and naturally want to find ways of managing it as effectively as possible. But high-net-worth individuals also like to support early-stage, exciting companies – they like to feel involved in something. The EIS is one of the few ways they can do both these things.
“We all need to be conscious that schemes such as the EIS are extremely important and they contribute a huge amount to the economy; they need to be protected and looked after.”
You can find out more about the tax reliefs offered by the EIS on our What is EIS? page.