By Daniel Hunter

Investors backing start-ups and small and medium-sized enterprises (SMEs) through the government’s tax efficient EIS and SEIS initiatives are set to benefit from £525 million in tax relief this year, according to equity investment firm Radius Equity.

Radius Equity said that this significant increase highlights growing investor interest in SME investments almost three years on since the rules were changed to open up investments into smaller and larger businesses through these initiatives.

According to Radius Equity, HMRC estimates the total income tax relief on investments made through the Enterprise Investment Scheme (EIS) will hit £350m in 2014-15, a 17% increase on 2013-14 when the estimated tax relief was £300m.

The anticipated increase in income tax relief for those investing in start-ups through the Seed Enterprise Investment Scheme (SEIS) is even greater. HMRC expects £85m in income tax relief for SEIS investments in 2014-15 - a 42% jump on the previous year’s £60million estimate.

In addition, relief on Capital Gains Tax for EIS investments is expected to increase by a half to £90m this year compared to £60m last year.

The programmes are designed to encourage investment in small, unquoted companies. EIS was expanded in April 2012 to enable investors to input greater amounts into larger companies across a wider range of sectors. SEIS was launched at the same time to stimulate investment in start-ups and early stage businesses.

Under EIS, investors receive 30% initial income tax relief, while under SEIS, investors receive 50% tax relief in the tax year the investment is made. Both programmes allow investors to reduce Capital Gains Tax to zero on assets disposed of after 3 years(see box below).

Gary Robins, Director at Radius Equity, said: “The fact that official tax relief estimates for EIS and SEIS investments is soaring is a clear reflection of the increasing appetite among investors for these sorts of high growth, tax efficient opportunities.

“It suggests they are piling more capital in greater numbers into the SME arena, drawn by the potential for impressive returns but also by the tax benefits too.

“Now that the rules have been opened up to span a wider variety of potential investments with a greater range of risk and reward profiles, from seed enterprises to well-established firms, for many this has become a highly attractive route to small business investing.

“As the impact of the recent changes filters through, more and more entrepreneurs and ambitious businesses are successfully raising the vital capital they need to invest in growth, capture market share and capitalise on their potential.”