Some further thoughts on the recent Budget
The 2014 Budget has been labelled as the “Budget for Investors”.
There has been a recent trend emerging from the current Government which has been enforced with the 2014 Budget – The Government is clearly trying to encourage investment in vital areas of the economy, rather than into already large and well-capitalised companies that may well have a large part of their operations or spend their money overseas. The Budget 2014 has made some notable changes for EIS, SEIS, Social Impact and P2P lending in ISAs.
Investing in smaller companies supports a vital and dynamic part of the UK economy. 95% of employees in the UK now work in businesses with less than 100 staff. There are approximately 5,000 SMEs (businesses with less than 250 staff) in the UK, accounting for about 50% of the total turnover in the private sector (£3,132 bn). It can also be argued that there is an ethical side to investing in smaller businesses – they give something back and support an important part of the economy. Our upcoming EIS Industry report will provide detail and background to investing into small companies.
Budget 2014 – Changes
The first significant change to be aware of is the planned change to EIS investments to exclude Government backed subsidies such as ROCs and the Renewable Heat Incentive. The Enterprise Investment Scheme is designed to give tax reliefs to investors who support higher risk start-up companies. Some EIS structures currently invest into projects backed by ROCs and are considered relatively low-risk investments, but they still obtain the tax reliefs available. These investments therefore are not supporting the higher risk start-ups that EIS is intended to encourage. This change will also affect SEIS.
Great news for SEIS! The Seed Enterprise Investment Scheme (which was set to expire April 2017) has been made permanent. Investors will be able to claim 50% tax relief up to a maximum investment of £100,000 and 50% reinvestment relief when capital gains are reinvested into SEIS qualifying companies. Again the Government is showing initiative to promote growth in small UK businesses, with over 1,600 companies having raised over £135 million from the SEIS since April 2012.
The Government is bringing in a new tax relief for investment into social investments, called SITR. Starting 6 April, 30% tax relief will be offered to those that invest in unsecured, asset-backed bodies. These include community interest companies (CIC), charities and community benefit societies (Bencoms). Eligible organisations (with a maximum of 500 employees) will be able to receive up to €344,827 (£290,000) of investment through this scheme over three years.
The final advantage for savers/investors is that the ISA will also be reformed into the New ISA (NISA) from July 2014. NISA will have an increased allowance up to £15,000 and will allow the free transfer between stocks and cash. Another interesting change worth noting – P2P lending will be allowed within a NISA, and the Government is also looking into allowing crowdfunding investments! Watch this space!
A final note – it is always important to evaluate the risks of any investment and this is certainly true with smaller companies. There are a few important risks to note. The most obvious risk is company failure. Typically with EIS, whereas one in ten investments return 10x capital, approximately 5 out of ten return less than capital (or fail completely). The tax breaks are an incentive designed to offset this risk and make investing into smaller companies more attractive (but tax breaks alone don’t make a good investment!).
But overall, it’s good to see the Government working hard to stimulate this type of investment.