Discover the benefits of Enterprise Investment Scheme tax relief and decide if the EIS is right for you.
Overview
If you’re looking for information about EIS investments and their benefits, here’s a quick overview to help you understand why they were introduced, and some of the key EIS benefits available to potential investors.
EIS Investments – Boosting Businesses
The UK government introduced EIS investments in 1994, building a range of tax benefits into the scheme to encourage investors to shore up new small businesses by becoming shareholders.
To make EIS investments work, businesses must be identified as having high-growth potential – and some types of business are exempt from participation. The idea is, that with early investment, these companies will grow and mature at a faster pace, subsequently paying into the treasury to support the economy, while also providing employment opportunities – both of which will increase as the business enjoys further success.
It’s prudent to state straight off the bat that EIS investments aren’t for everyone. While there are plenty of benefits, which we explain below, there are risks to consider with your personal circumstances too. Our Beginner’s Guide to the Enterprise Investment Scheme looks into these details a little more closely, but as with any plan to add to your portfolio, you should always seek expert advice before you make any decisions.
EIS Investments From Launch
1
53,000 individual companies
Over 53,000 individual companies have received investment through EIS and SEIS investments and over £30 billion funds have been raised.
2
£436 million of funds
Around £436 million of investment was raised by 1,280 new EIS companies in 2022-2023
3
Pension limits
Advisers are using EIS to counteract lower pension limits, rising assets prices and more estates being caught in the IHT trap.
4
Tax relief
Tax relief is now seen as incidental and acts merely as a risk mitigator.
5
£3bn in tax relief
EIS has cost the Treasury more than £3 billion in tax relief over the last decade but industry calculations demonstrate for them to “break even”, only nine jobs need to be created per £1 million of EIS investment.
6
Tax efficient schemes
For every £1 invested via tax efficient schemes the government gets back £4.
EIS Investments – Latest Figures
The latest government statistics show that in the period of 22/23, 4,205 UK businesses received £1,957 million in EIS investments – £436 million of which was raised by 1,280 new companies to the scheme. The global Covid pandemic had an obvious impact during this period, but confidence has returned and investments have taken an upturn in more recent times.
London and the South East of England were the areas drawing the most investment, at a substantial 65%, and as has become expected during the course of the scheme, the information and communication sector is the biggest participant overall.
EIS Benefits
EIS benefits are designed to provide attractive tax relief gains, cushioning associated risks and encouraging investors to support SMEs in their quest for raising finance.
EIS investors are eligible for the following tax reliefs:
EIS Benefit #1 – Income Tax Relief
Upon investing into an EIS qualifying company, investors can claim 30% income tax relief on the amount invested against their income tax bill. It’s possible to ‘carry back’ all or part of the investment to the preceding tax year – as long as the limit for relief is not exceeded for that year.
EIS investments need to be held for 3 years for the tax reliefs to be retained.
- Up to a maximum of £1m or up to £2m (if anything above £1m is invested in Knowledge Intensive Companies) current and preceding year.
- 30% income tax relief on subscription amount.
- Relief will be partially or wholly withdrawn if the relevant shares are disposed of within 3 years of acquisition or within 3 years of the company starting to trade if later; or if the investor or company ceases to qualify within that period; or if the investor receives value in that period or the 12 months prior to the share issue.
- Income tax relief is not withdrawn if the company becomes quoted within 3 years.
- Transferring shares to a spouse or civil partner during the 3-year period will not trigger a clawback of relief – but transferring to any other third party does.
EIS Benefit #2 – No Capital Gains Tax
Provided the shares are held for a minimum of three years, there is no Capital Gains Tax (CGT) due on the proceeds. However, the shares can be held for much longer to realize the investment potential, thus continuing to shelter gains from CGT and potentially sheltering substantial capital gains.
EIS Benefit #3 – Inheritance Tax/Business Relief
The companies being invested into also qualify for Business Relief. Shares that have been held in a qualifying EIS investment for two years or more at the point of death fall outside of an investor’s estate for IHT purposes. This gives a potential saving of 40% on the full value of shares held.
EIS Benefit #4 – Loss Relief
Loss relief applies in the event that an investment becomes crystallized as a loss. Investors can offset up to 45% of this loss, net of tax relief. You can read more about how this loss relief works here.
EIS Benefit #5 – Capital Gains Tax Deferral Relief
Capital gains made 3 years preceding or 12 months after investment can be deferred utilizing EIS qualifying companies and could potentially be further reduced by other tax allowances over time. This could include timing disposals to utilize annual CGT allowances and inter-spousal transfers to maximize tax efficiency.
EIS Benefit #6 – Business Investment Relief
A UK resident, non-domiciled individual can remit ‘clean capital’ (i.e., offshore funds that do not represent income or gains that would be taxed on remittance) to the UK without a tax charge. The investment must be made within 45 days of the offshore income or gains being remitted in a UK qualifying company. To learn about EIS investments and their benefits in more detail, request your copy of our EIS Investment Guide.
Taxation depends on individual circumstances and is subject to change without notice. We suggest you seek independent tax advice where applicable.
Additional EIS Benefits
While it’s clear that for any investor, money is the bottom line, there are some other, less tangible benefits that come with EIS investments…
Accelerated Business and Investment Growth
Being part of something big from the beginning is always a nice feeling, and with EIS investments, you’re helping small businesses with big plans for growth and success take the next step. While there’s no guarantee of their journey’s outcome, there’s a sense of confidence that comes with knowing the shares you’re buying are backing owners with energy, drive, and commitment.
Encouraging the Economy
By the nature of the types of businesses usually seeking involvement in the scheme, your investment will be in support of future-thinking companies that are focused on innovation. They’re the thinkers of today and the big employers of tomorrow – as they grow, so does our economy with them.
Diversifying and Complementing
While EIS investments are no replacement for more stable long-term options such as a pension, they can be used to complement your existing portfolio – while adding some diversification at the same time.
Getting the right balance in your portfolio is key, and EIS investments can be a great addition to your current interests, providing you understand the risks and benefits you’ll be able to access according to your personal circumstances.
If you’d like to speak to an EIS investment expert, please drop us a line and we’ll be happy to discuss how the available EIS benefits might apply to you.
