The number of investors putting small sums into tax-efficient funds jumped sharply last year, in a sign of the growing popularity of crowdfunding platforms.

Just over 10,000 users of the enterprise investment scheme (EIS) injected up to £5,000 into early-stage companies in the year to April 2016, an 18 percent increase on the previous year. The EIS uses generous tax breaks, including upfront income tax relief, to encourage investors to finance early-stage companies.

HM Revenue & Customs, which published the latest statistics, highlighted the “increasing use of crowdfunding platforms” which allow retail investors to take equity stakes in small unlisted start-up companies.

Andrew Hubbard, a tax consultant at RSM, professional services firm, said crowdfunding had made the tax-advantaged investment schemes a practical way for companies to raise money from small investors.

He said: “We see that as a positive sign — previously start-up companies have struggled to find a way of encouraging small investors to make investments which, by their very nature, carry some risk.”

The seed enterprise investment scheme (SEIS), a tax-advantaged scheme launched in 2012 to encourage start-ups, was also increasingly popular with small savers. In the year to April 2016, there was a 26 percent rise to 985 in the number of those investing £500 or less.

Overall, the money raised by EIS dipped slightly from £1.93bn to £1.89bn in the year to 2015-16. The total amount raised by SEIS funds edged ahead by £500,000 to £621m in 2015-16.

The decline followed restrictions on the inclusion of renewable energy projects in the EIS, which began in 2012 but was expanded in July 2014. This was reflected in a £233m decline in the funds raised by the energy and water supply sector between 2014-15 and 2015-16.

It also followed rules introduced in 2015 to make scheme providers use the funds for the “growth and development” of a business, which some say has increased the risk they take on.

The Treasury is now considering a further tightening of the rules ahead of this month’s Budget. In a recent consultation into how best to help innovative firms obtain long-term financing, it said the upfront income tax relief provided through the schemes encouraged their use as “capital preservation” investments.

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Source: Financial Times.



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