The hidden value of tax reliefs

24th October 2019

This week, The Institute for Fiscal Studies published a report questioning the value of Entrepreneurs’ Relief – a tax relief introduced in 2008 to reduce capital gains tax for entrepreneurs selling their business. The think tank joined calls for the relief to be scrapped in the upcoming Autumn Budget. The relief is designed to encourage subsequent investment after an exit and thus create more growth and jobs in the small business arena.

This is not the first relief of this kind to be questioned, but there is a reason that the Government continues to keep them in place; they encourage both entrepreneurialism and investment in a vital area of the economy. Since the Enterprise Investment Scheme was introduced in 1993 its tax efficiencies have encouraged the investment in, and growth of, small businesses looking to expand and scale. This is a vital source of funding for these firms that often go on to grow and create significant numbers of jobs.

The EIS offers significant tax efficiencies to investors when they financially support small businesses in the UK. The primary benefit is that the EIS investor will receive income tax relief of up to 30% on the investment, alongside the ability to defer capital gains tax. Investments made through the scheme are also – after two years – exempt from inheritance tax and capital gains on any growth in value.

However, these reliefs are not solely for the benefit of investors. The growth and job creation that this investment encourages is said to increase tax receipts by as much as three times the amount of tax revenue lost through the efficiencies.

25 years on, the EIS has been responsible for 29,770 individual companies receiving investment, and over £20billion of funds raised. This is not an insignificant amount of money which looks set to increase at an increasing rate; as investment likely went over £2billion in 2017-18 alone.

Investing in businesses through EIS is especially important as SMEs make up around 98% of businesses in the UK private sector and contribute £1.9 trillion each year towards the economy of the UK. Furthermore, the sector accounts for the employment of around 16 million people in the UK.

To find out more about IW Capital, or for more information on investment and non-executive opportunities, please speak to a member of the IW Capital team today on 020 7015 2250, or email info@iwcapital.co.uk