As investment methods become more sophisticated, we have witnessed an increase in the popularity of crowdfunding and the Enterprise Investment Scheme (EIS). In this article, Current Capital provides an overview of each and the benefits they bring:
What is the EIS and what are the benefits?
The EIS is a government scheme put in place to encourage investment in companies from qualifying investors.
Particularly beneficial for smaller businesses with a higher risk, the scheme helps companies generate funds by offering tax relief to investors. Benefits include:
- A deferral of EIS Capital Gains Tax for the life of the investment on the amount subscribed.
- 30 per cent EIS income tax relief on the amount subscribed, which can be up to a maximum investment of 1 million in the 2017/18 tax year and/or 1 million which is carried back to the 2016/17 tax year for a minimum of three years.
- 100 per cent inheritance tax relief after two years, so long as the investment is held at the time of death.
For a UK taxpayer investing 100,000 into a company, HMRC will grant a 30,000 tax rebate, providing that the income tax liability exceeded 30,000 in the previous taxable year.
Accountants, financial advisors or even word of mouth have previously been the traditional methods for learning about investment opportunities just the start of the investment process.
Following this, investors will need to qualify by getting the necessary self-certification before they can receive a presentation, brochure and application form about the opportunity. Those still interested in the investment would then be expected to sign an Investment Memorandum, and then perform their own due diligence and negotiate terms of their investment. Even then, the process wasnt complete, as significant know your client procedures would need completing before funds were transferred to a lawyers account.
This process is time-consuming, involving investors organising their own due diligence and paying any associated costs. Fortunately, crowdfunding has made the entire process much more efficient.
Crowdfunding is used by companies of all sizes to raise money for a project, as well as gathering support and awareness. However, it is especially beneficial for small businesses that have previously been turned down by High Street banks as they can appeal directly to small investors (including members of the public) by trying to raise money for an idea in return for a share in the business.
Crowdfunding benefits include:
- You receive advocates who will support both a business and their idea, becoming part of the journey and making for appealing ambassadors when the project develops in the future.
- Additional funding can be unlocked, such as grants, if a charity or community group or investors, loans or a pre-cursor to an equity crowdfunding campaign if a business.
- While creating and launching a project via a crowdfunding platform, those with the idea will need to think about how best to market the idea developing their marketing skills in the process.
- Validation is received by the fact that small investors and members of the public are on board with an idea and are already paying or contributing in order to bring it to market.