Maximise Your Investment with EIS Tax Relief: A Comprehensive Guide

What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme is a UK government-run venture capital scheme that first appeared in 1994. It is an initiative aimed at encouraging individual investors to invest in medium-sized UK businesses by rewarding them with significant tax breaks.

Investors can look forward to the following EIS tax reliefs:

• Income tax relief
• Capital gains tax relief
• Inheritance tax relief 
• Loss relief

Those tax incentives encourage investors who would usually avoid higher-risk investments to buy shares from EIS-qualifying companies. 

That EIS investment helps the company raise the capital it needs to grow and prosper while the investor can look forward to massive tax breaks – especially if the investment proves successful. 

An angel investor will not pay capital gains tax on profits from selling the company’s shares. Furthermore, even if the investment goes south, the investor’s losses are greatly offset by claiming loss relief. 

It is important to understand that while making EIS investments offers significant tax benefits, these are really there to mitigate risk. If a company fails, investors are likely to lose most, if not all, of their investment. 

Therefore, we strongly suggest high levels of due diligence before making this kind of investment. We also recommend only experienced investors take the risk as part of a diversified portfolio of investments. 

Despite the positive tax treatment offered, we believe those new to investing should look for safer investment opportunities.

What are the Differences Between the EIS and SEIS Venture Capital Schemes?

Both the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) offer investors tax benefits in return for investing in UK companies. 

The differences lie in the size and age of the companies seeking investment:

• SEIS:  The Seed Enterprise Investment Scheme encourages investment into early-stage startups. 
• EIS: The Enterprise Investment Scheme aims to generate investment for more established small businesses

While there is a risk associated with investing through either of the schemes, it’s widely recognised that investing in small companies carries a greater risk than investing in more established businesses. 

Therefore, greater tax relief benefits exist for investors participating in the SEIS investment scheme. 

Who Qualifies as an EIS Investor?

To qualify as an Enterprise Investment Scheme investor, there are strict criteria in place:

• They must have UK income that is liable for income tax.
• They’re not employed by the EIS-qualifying company or a director.
• They do not have a substantial interest in the company (more than a 30% stake).
• There have been no linked loans between the investor and the company since the latter’s incorporation and up until the third anniversary of the shares’ issuance. 
• The investment is genuine and not for tax avoidance purposes. 

Adding to the above, investors hoping to claim EIS relief must comply with the following conditions:

• The investment must pose a significant risk and not just become a vessel to avoid tax liability via tax relief. 
• The investment never exceeds the maximum amount allowed per year. The maximum investment permitted for most EIS companies is £1 million per year. However, that increases to £2 million in a tax year for EIS investments in knowledge-intensive companies.
• They paid for the issued EIS shares upfront. 
• They hold the shares for at least three years before selling them.

Please note that EIS rules can change at any time. As you’ll discover shortly, they changed as recently as 2023. For that reason, ensure you’re always up to date with the current rules so that you remain a compliant EIS investor. 

How Does EIS Tax Relief Work?

The tax reliefs offered are the primary reason why qualifying investors make investments using the Enterprise Investment Scheme. We’re confident most would avoid such risky investments otherwise. 

Below, we’ll show you how those EIS tax incentives work:

Up to 30% Income Tax Relief

EIS investors can claim up to 30% income tax relief on their investments. For example, assuming they’ve met all conditions, a £300,000 investment could yield an investor income tax relief of £100,000.

In circumstances where an investor’s income tax liability is not enough to take full advantage of the EIS income tax relief, they can carry it back to the previous tax year. 

To claim EIS income tax relief, the investor must have held the EIS-qualifying shares for at least three years, and the company must remain eligible for the scheme throughout.

Capital Gains Tax Relief

Thanks to the capital gains tax relief afforded by the Enterprise Investment Scheme, a successful investment provides two reasons to celebrate. Not only has the investor made gains on their outlay, but they’re also exempt from capital gains tax.

Depending on the size of the gains, those tax savings could prove substantial. Current CGT rates on non-residential assets are 12% for basic rate taxpayers and 24% for higher and additional rate taxpayers. Therefore, a £1 million gain will result in tax savings of £120,000 or £240,000, respectively. 

Any profits made from the sale of EIS-qualifying shares are free from capital gains tax as long as those EIS shares were held for at least three years before their sale. 

Capital Gains Deferral Relief

Moreover, investors can receive capital gains deferral relief by re-investing gains from EIS investments or the sale of other assets. You can defer that capital gain for as long as the gains remain invested through EIS. 

For example, if you bought an asset for £120,000 and later sold it for £200,000, you’ve gained £80,000, which is now subject to CGT. However, by making an EIS investment of at least £80,000, that gain can be deferred. 

Inheritance Tax Relief

The tax benefits could continue even after your passing. Any EIS shares held for at least two years are not subject to inheritance tax. 

EIS Loss Relief

There’s no getting around it: an unsuccessful EIS investment will incur losses. However, thanks to EIS loss relief, investors can at least offset some of those losses against their income tax bill or capital gains tax for the current or previous tax year. 

An investor qualifies for loss relief if the value of sold shares has fallen below their effective cost. The effective cost of an investment is the total amount invested minus any claimed income tax relief. 

An example would be a £200,000 EIS investment, which has so far led to the claiming of £60,000 income tax relief. The effective cost is therefore £140,000. If the shares are sold for less than that effective cost, the investor is eligible for loss relief. 

When Can You Claim Your EIS Tax Reliefs?

You can claim tax relief when completing your self-assessment tax return, which is due before January 31st each year. Any tax relief an investor is owed must be claimed within the first five since filling out their first tax return. 

Investors should also note that tax relief can be carried back to the previous tax year. This allows an investor to invest double the usual maximum investment limit (£1 million for normal businesses and £2 million for knowledge-intensive companies). 

What Companies Qualify for EIS Investment?

To become an EIS-qualifying company, a business must meet specific requirements. They’ll qualify for the EIS scheme as long as:

• Their first commercial sale came within the last seven years.
• They have no more than 250 full-time staff.
• Have gross assets worth less than £15 million.
• They are not listed on a stock exchange.

Furthermore, a company must submit a business plan, financial forecasts, and a variety of other required documents as part of the application process. 

A company that qualifies for the Enterprise Investment Scheme can receive up to £12 million in investment from the scheme across its lifetime. However, the maximum allowed per year is capped at £5 million. 

How Does a Business Qualify as a Knowledge-Intensive Company (KIC)?

A knowledge-intensive company (KIC) is a status given by the EIS scheme to any company that is engaged in significant research, development, or innovation in a high-potential sector. 

Examples include biotech startups developing new medications and therapies or clean energy companies developing new renewable energy technologies. 

To qualify for EIS as a KIC, a company must:

• Have traded for no longer than 10 years since its first sale. 
• Have spent 10% or more of its operating costs on research and development in each of the last three years. Alternatively, a company will qualify if it can show it spent 15% or more in one of the last three years. 
• Show that 20% or more of its employees work full time on research and development. They’re also required to hold relevant degrees, such as PhDs. 

Through EIS, a company with KIC status can receive up to £20 million in investment but no more than £10 million in a single year. 

The Steps to Making an EIS-Qualifying Investment

Assuming you qualify as an EIS investor, you need only establish an investment opportunity you believe in.

The company seeking investment must carry out most of the work. They’ll have to request advance assurance from the HMRC while their application is under review.

The company will receive a compliance statement and can issue shares if advance assurance is granted. 

At that point, you must purchase the shares upfront and hold them for three years before claiming relief on your tax bills. 

As an important note, the company must send you a copy of the compliance statement. You’ll need it to claim income tax relief and the other EIS tax benefits. 

EIS Tax Relief FAQ

What are the benefits of investing through the Enterprise Investment Scheme?

Investors receive tax benefits in return for their investments. After three years of holding EIS shares, investors can claim income tax relief, sell the shares without paying capital gains tax, or receive CGT deferral relief by re-investing gains. Other benefits include inheritance tax relief and loss relief. 

What is the maximum EIS tax relief an investor can claim?

Currently, investors can claim up to 30% income tax relief on EIS investments up to £1 million. If you invest in a knowledge-intensive company (KIC), that limit is doubled to £2 million. 

Is it possible to carry forward EIS income tax relief?

No, it is only claimable for the current or previous tax year. 

Are there alternatives to the Enterprise Investment Scheme?

Yes, you could consider the Seed Enterprise Investment Scheme (SEIS) or Venture Capital Trusts. However, these carry increased risks as both require investing in early-stage companies. 

Is there a minimum limit I can invest via the EIS scheme?

The EIS scheme itself does not require a minimum amount of investment. However, the EIS-qualifying company you want to invest in, may have a lower limit they’d accept. 

How do I qualify as an EIS investor?

Any UK taxpayer can invest through the EIS scheme as long as they have no vested interest in the company and are not an employee.