The UK’s vote to leave the European Union has led to political chaos, with a change of Prime Minister certain and a general election a distinct possibility. We have already seen turbulence in the financial markets both within Britain and around the world, and a number of transactions put on hold or postponed. What does this mean for investment in small and growing businesses, especially those in the technology and life sciences sectors?
EIS likely to remain stable
The good news is that the Enterprise Investment Scheme, or EIS, seems likely to remain stable while the negotiations proceed. This scheme offers substantial income, capital gains and inheritance tax benefits to investors in small unquoted companies.
But the EIS has been subjected to criticism by the EU Commission under the EU’s state aid rules. Approval of the latest arrangements in October 2015 was hard won. Although further improvements have been under discussion, changes to the scheme now seem unlikely given the range of other pressing issues to contend with, on both sides. So we expect the current regime to remain in place for the next two years and more.
Question marks over Investor appetite
The greater question may be investor appetite. With the current uncertainty expected to last for years rather than weeks, will investors prefer to hold off for the time being while the dust settles? This could put a dampener on a generation of new businesses that need investment now. This presents a pessimistic picture for entrepreneurs.
However, the prospect of increasing tax rates to protect government revenues in a falling economy, alongside continuing low interest rates as the Bank of England acts to maintain liquidity may mean that investors turn to opportunities like EIS investments to maximise their returns and minimise an increasing tax burden.
In the longer term, some are optimistic that moving away from Europe’s tough stance on regulation of investment activity may improve the situation both for investors and growing businesses.