What is the Enterprise Investment Scheme?The Enterprise Investment Scheme (EIS) is one of the few remaining government-backed tax efficient investments backing small to medium sized enterprises. Introduced in 1993-94, EIS was devised to raise finance for smaller, higher-risk businesses while offering EIS tax relief to investors who buy ordinary shares in those businesses.Since EIS launched, the scheme has supported over 24,500 individual companies and generated in excess of £14 billion in SME funding.
How do EIS investments benefit businesses?The EIS scheme has been instrumental in supporting the growth efforts of Britain’s businesses, by offering a further incentive for investors to support developing companies. The number of businesses backed through the EIS investment scheme has continued to rise. In 2014-15, 3,130 companies raised £1.66 billion worth of funds, compared to 2,795 businesses that raised £1.56 billion through the Enterprise Investment Scheme in 2013-14. This marked a further increase from the 2,470 companies that raised £1.03 billion in 2012-13.
As an investor, how do I benefit from EIS relief?For up to £1 million per individual, investors can receive EIS tax relief of 30%, so for a £100,000 investment, the 30% income tax relief will mean the actual cost of that investment is £70,000. To offset income tax, this allowance can also be added to the previous tax year. For example, £1 million (the maximum investment that qualifies for the Enterprise Investment Scheme per annum) of a £2 million investment could be carried to the previous tax year.
How long do I have to hold onto my shares through EIS investments to receive EIS tax relief?To benefit from EIS relief and receive 30% income tax relief, investors must hold on to their shares for a minimum of three years from the date they are issued.
The maximum amount of funding a company can receive through EIS investments is £12 million, or £20 million for knowledge intensive companies
Companies need to have made their first commercial sale within the last seven years, or ten years if they are a knowledge intensive company
Companies that operate in the subsidised generation of renewable energy or that are involved in the provision of a reserve energy no longer qualify for the Enterprise Investment Scheme
Companies cannot use EIS investments to fund management buyouts or acquisitionsWhat kind of companies qualify for the EIS scheme?The Enterprise Investment Scheme guidelines have been updated regularly to comply with EU rules on State-aid. After reforms were introduced by the Finance Act 2015, the criteria for companies has updated to include:
What is the difference between the EIS and other tax efficient investments?For Venture Capital Trusts (VCTs) investors can claim 30% income tax relief on investments worth up to £200,000 annually. However, the scheme differs to EIS in that investors subscribe to shares in a trust and fund managers then use the funds to invest in VCT qualifying businesses.The Seed Enterprise Investment Scheme (SEIS) operates in a similar way to the Enterprise Investment Scheme (EIS) in that investors qualify for income tax relief – up to 50% annually on an investment of £100,000 – however the companies that qualify for SEIS are very early stage businesses.Companies that qualify for EIS are much more mature in their development, having made their last commercial sale within the past seven years (ten years for knowledge intensive companies). EIS investors also benefit from no Capital Gains Tax (CGT) providing they hold their shares for a minimum of three years. To potentially shelter from substantial capital gains, investors can hold their shares for much longer than three years.Investors in the scheme can also shield from Inheritance tax (IHT) on their EIS investments after two years from the investment date. Loss relief also applies in the event that a share materialises at a loss, and Capital Gains Tax deferral relief is also available. To find out the full extent of EIS tax relief benefits, visit our What is EIS page?