As you know, I’m not slow in coming forward to criticize our politicians and regulators when they take actions that I regard as harmful. So you might be shocked because today I want to sing the praises of the British government for one specific area in which I think the UK leads the world.

I’m talking about the way the government and the tax authorities encourage private investors to support growing business through the Enterprise Investment Scheme and its little brother, the Seed Enterprise Investment Scheme. We’ve all seen the statistics that prove how heavily the odds are stacked against a start up turning into a multi million pound enterprise that makes profits, creates jobs and pays taxes. In other words, the lifeblood of any economy that is serious about growth and productivity. These schemes are designed to reward the risk we take in supporting these companies in the hope that they will eventually pay the country back by becoming the next Dyson or Brewdog or Innocent.

But first, I must have a rant. The accepted narrative today is that Truss and Kwarteng were a disaster and thank goodness the grown-ups are now back in charge. I completely, 100% reject that narrative. While they undoubtedly made mistakes, in my opinion they were the last hope for a credible Conservative party and the last hope for economic growth in the UK this decade. The combination of high growth and low taxes that they planned represent the only way out of the pit that we are sliding into under Sunak and Hunt. The country is broke, living beyond what it raises in tax revenue and going ever deeper in debt to fund the commitments made by vote-buying politicians. Combine four years of blue Labour with the probability of a decade under Keir Starmer and let’s reconvene in 2024 to assess the state of the nation.

The only policy to survive the establishment coup that removed Truss is the improvements to the Seed Enterprise Investment Scheme that come into effect in April. The amount that small companies can raise under SEIS will rise from £150,000 to £250,000, while the amount that you and I can contribute to SEIS schemes in a single tax year will double from £100,000 to £200,000. To benefit from SEIS the company still has to have been trading for less than two years and have fewer than twenty-five employees, but the amount of assets they can hold increases from £200,000 to £300,000.

As an investor, you immediately get in for half price because 50% of your investment can be taken as an income tax refund. Hold the shares for three years and there will be no capital gains tax to pay. Given how rapidly they are removing the capital gains allowances, and the possibility of CGT being aligned with income tax in the future, this is a massive benefit for investors. The whole point of these companies is that they will grow quickly to become much more valuable. So you are in it for the capital uplift and the opportunity to keep 100% of that gain is by far the most important benefit of both the Seed Enterprise Investment Scheme and the larger Enterprise Investment Scheme.

There’s no change in the rules of the EIS scheme but they were already generous enough to start with. While companies qualifying for Seed EIS really are tiddlers, under the main EIS scheme you get the chance to invest in some well-established enterprises with a proven business model, a strong team and some chunky assets. The ceiling on assets they can hold rises from £300,000 to £15 million, along with a ten-fold increase in staff up to the limit of two hundred and fifty. The company can raise up to £5 million under the EIS scheme in a single tax year and a total of £12 million in the company’s lifetime. The funds raised have to be used within twenty-four months.

EIS investing is not quite as generous as SEIS but still hugely attractive. You can immediately offset 30% of your investment against your income tax bill and, once again, after three years the shares can be disposed of without a liability to capital gains tax. You can invest up to £1 million in any given tax year, which would equate to a £300,000 gift from those nice folks at HMRC. In recent times a new category of company called KICs has been defined to garner additional benefits. These are Knowledge Intensive Companies which are perceived as having higher growth potential so you can invest up to £2 million a year in EIS companies if at least half of that total goes into KICs.

And there’s more. Let’s say that, like many Beaufort members, you’ve fallen out of love with Buy To Let property and so you sell one of the homes in your portfolio. You’ve owned it for twenty years so there’s a £200,000 capital gain that could cause a horrendous tax bill.  You can defer that tax bill by investing the gain, i.e. the £200,000 but not the full sale price, into EIS shares. Hopefully the gain from the shares will be such that, when you eventually sell them, the CGT deferred will look like small change compared to the overall gains you’ve made. And the window for doing this is very wide. It starts 12 months before you realise the gain and it goes on for three years after you’ve trousered the cash. So you have 48 months to decide whether to defer the gain by investing it into growth shares that are EIS qualifying.

And there’s yet more. EIS shares qualify for Business Property Relief which means that, after you’ve held them for two years, they are regarded as being outside your estate and can be passed to your heirs without losing 40% to the dreaded Inheritance Tax.

Of course, by definition you are investing in relatively young companies so there is a measurable amount of risk that things won’t go according to plan. What happens if the company goes bust or if you end up selling the shares for less than you paid for them? The answer is that EIS also includes loss relief. This gives you the flexibility to offset any loss against either your capital gains tax bill or your income tax bill, whichever is more beneficial to you. The loss relief is limited to the actual cost of your investment, so if you invested £100,000 and claimed tax relief of £30,000 your maximum loss relief would be £70,000. The offset is at your highest marginal rate of tax, so there will still be a real loss of some capital but anything up to 45% would be reclaimable.

So you have unlimited upside, a discount of thirty to fifty per cent on the way in, no CGT or inheritance tax to pay and almost half of any loss can be recovered. That’s as close to the perfect investment scenario as any of us could wish for. We’ve used these schemes when we raised funds for Rebel Energy and our members are benefitting from it again with a fast growing precious metals company that we are raising growth capital for at the moment. Remember, to benefit from this you need to be UK tax resident and, ideally, be paying a lot of income tax and/or have recently realised a significant capital gain.

We are not authorized to give tax advice so you must seek professional advice before acting on the SEIS and EIS schemes. If you join Beaufort Society from our website we can put you in touch with experts who can help you and share details of any EIS qualifying opportunities in our portfolio.

I hope I’ve convinced you that these enterprise investment schemes are among the best in the world and a credit to the UK for its leadership in this field. But let me finish with a warning. We must never let the tax tail wag the investment dog. You must always do your own due diligence on any company in which you are thinking of investing. It’s harder at the SEIS level because there is so little track record to study. But there are some gems out there is you look for them. We are raising funds for a company with 180,000 clients, a hundred million pounds on its platform and a board made up of some of the most credible people in their industry. If everything goes to plan our investors will make a 30X return when the company goes public in 2025. And they won’t pay a penny of tax on that life changing gain.

Happy hunting, and I’ll see you next time!