Enterprise Investment Scheme – EIS Benefits – Maximising Your Investment Returns

EIS Benefits – Enterprise Investment Scheme Relief

UK tax paying investors participating in EIS have several tax reliefs available, and we discuss these in more detail below.

Income Tax Relief

Although still a high-risk investment, the EIS allows investors to offset some of the risk of investing in small companies by claiming up to 30% income tax relief on those investments made through the EIS. There are no minimum investment limits, but you can invest up to £1 million per tax year, meaning income tax relief of £300,000. That is, if you have sufficient Income Tax Liability to cover that reduction and have held the shares for at least three years.

The maximum investment can increase to a maximum of £2 million per year, but only if investments above £1 million are made in ‘knowledge-intensive companies’ (KIC). The HMRC has given these companies a somewhat special status because they carry out research, development, or new innovation. For example, a start-up researching a new drug that could prove ground-breaking would qualify as a KIC.

Tax-Free Growth – Exemption from Capital Gains Tax (CGT)

Another big attraction is that should an EIS investment prove successful, growth in value is 100% tax-free. Any money raised from your investment is free of any tax treatment. However, we should note again that any EIS investment carries a high risk as smaller companies are likelier to fail than larger counterparts. On the flip side, smaller companies have the potential to grow in value quickly.

To qualify for this exemption of CGT, any income tax relief must have been claimed already. The company you’ve invested in must remain eligible for the EIS scheme for at least three years, and you must hold its shares for the same period.

Capital Gains Tax Deferral

A Captial Gains Tax Deferral is when you reinvest a taxable capital gain from selling other assets such as property or investments such as those made through the EIS. It allows you to defer the tax you’d usually have to pay on that gain by investing in an EIS-qualifying company. That gain is deferred for as long as the money gained remains invested.

Investors who qualify for deferral relief are those who reinvest into the Enterprise Investment Scheme no earlier than 12 months before or three years after the initial gain occurred.

Inheritance Tax Reliefs

Those who invest in an EIS-qualifying start-up will also benefit from 100% inheritance tax relief. All shares issued via the scheme qualify for business relief, meaning that as long as they’ve been held for two years minimum at the time of death, they can be left to beneficiaries free of inheritance tax.

Loss Relief

We must reiterate that this type of investment carries high risk, so while there are many success stories, there are just as many failures. Investors pin their hopes on their investment helping a smaller company to grow and prosper. However, the risk of share values dropping is greater with this type of investment than with others.

If your investment does not go to plan and a loss is made when disposing of EIS shares, that loss, minus the income tax relief received, can be offset against your current or the previous year of your income tax bill. For example, if you fall in the 45% tax bracket, this reduces any losses as follows:

What are the Eligibility Criteria for the Enterprise Investment Scheme (EIS)?

There are quite a few conditions that a higher-risk small to medium-sized company must fulfil to qualify to raise funding through EIS. However, the most important are as follows:

• The company must have made its first commercial sale within 7 years or less
• It is not listed on a stock exchange
• The company is based and registered in the UK
• Has no more than 250 full-time employees
• Has no more than £15 million in gross assets

An EIS-qualifying company can benefit from investments worth up to a combined £5 million each year or £12 million total throughout the company’s lifetime.

As for entities hoping to qualify as ‘knowledge-intensive companies’ (KIC), the criteria is as follows:

• It’s been less than 10 years since the company’s first qualifying trade or annual turnover exceeding £200,000
• It is not listed on a stock exchange
• The company is based and registered in the UK
• Has no more than 500 full-time employees
• The company carries out research or development or new innovations
• Can show that 20% of employees have carried out research for at least three years from the date the investment was received
• Must spend 10% a year for three years or 15% in one of three years of the company’s operating costs on research, development or innovation

A KIC can benefit from EIS investments worth up to a combined £10 million yearly or £20 million total throughout the company’s lifetime.

How to Invest in EIS?

Qualifying investors interested in helping a UK start-up and taking advantage of some of the tax breaks offered by EIS, there are some steps you’ll need to know about.

First, you must identify an EIS-qualifying company with EIS Advance Assurance. Then, you should speak to that company, negotiate your investment, and agree to proceed with it. Once you’ve invested your cash, there’s not much to do for a few years other than monitor your investment and obviously hope it proves successful.

How to Claim Your EIS Tax Relief

Assuming you’ve held your EIS shares for at least three years, you’re probably wondering how to claim tax relief.

The EIS companies you’ve invested in must complete a compliance statement (EIS1 form) and submit it to the HMRC. The HMRC usually reviews the compliance application between 15 and 40 days later and sends the company two documents.

Those forms are the EIS2 and EIS3. The former details the Unique Investment Reference number (UIR) you need to claim EIS tax relief. The latter is a document the company must send to prove your investment qualifies for EIS tax relief.

When filling in your annual self-assessment tax return, you can declare your investment using the UIR number given.

What is EIS Advance Assurance?

In short, EIS Advance Assurance is when HMRC declares in advance that a company meets the EIS requirements. It also means investments made in the company under the scheme will qualify for its tax benefits. 

Advance Assurance is not needed to invest in a company, but the business must satisfy those requirements for an investor to receive the tax benefits. For that reason, we advise anyone interested in EIS to choose companies that already have assurance. Otherwise, if you make the investment and the company does not meet the criteria, you’re not eligible for the tax relief or, should the investment fail, any loss relief.

Why Invest in EIS?

As long as you understand the risks, there are plenty of reasons to invest via the Enterprise Investment Scheme. The tax relief and rewards are potentially great, and you can diversify your investment portfolio and even support the UK economy.

Investment Portfolio Diversity

If there’s one thing most experienced investors know, it’s that diversification spreads your risk. Making substantial new investments in one company is a massive risk. If that company folds, your investment, although mitigated via the EIS, goes with it.

Alternatively, by spreading your money across multiple investments, you will not lose everything if one or more fail. The EIS will appeal to those who want to diversify their investment portfolio by making a medium-to-long-term investment that carries tax reliefs and runs independently from other investments.

High Growth Potential

While this type of investment carries high risk, it can bring huge rewards if successful. Many start-ups have exceptional scope for potential, and that, coupled with the tax claim relief of the EIS, could prove fruitful should everything fall into place.

Tax Relief

You receive five tax reliefs in return for taking a big risk on an EIS. You can claim income tax relief, tax-free capital gains, inheritance tax relief, and capital gains tax deferral. On top of that, loss relief is there to mitigate losses of EIS qualifying shares.

You Support the UK Economy

For many investors, not much is able to beat the thrill of finding a start-up with huge growth potential and helping it realise that potential. If successive, the investment drives the creation of new employment innovation and boosts the UK economy as a whole.

Understanding the Risks of EIS

As with any investment, the value of an EIS investment can rise and fall quickly, and you may end up getting back more or less than you initially put in. However, there is a greater risk when it comes to investing in start-ups than with most other types of investments.

Therefore, we believe EIS investing is for people with a high net worth who already have a diversified investment portfolio and can take the hit if the investee folds. Anyone new to investments should consider other types before the high-risk nature of the EIS.

FAQs about Enterprise Investment Scheme Relief

What EIS tax reliefs can I claim as an investor?

As an investor in the EIS, you can claim up to 30% income tax relief, capital gains tax relief, CGT deferral tax relief, inheritance tax relief, and loss relief.

What is the maximum investment allowed under EIS?

Those interested in an EIS-qualifying investment can invest up to a maximum amount of £1 million per tax year in EIS-qualifying companies per tax year. You can increase that investment to £2 million if any money above the initial investment is invested in knowledge-intensive companies.

How long must I hold EIS shares to receive tax benefits?

Investors must have held the EIS qualifying shares for at least three years to claim EIS relief under the Enterprise Investment Scheme.

What happens if an EIS company fails?

If a company you’ve invested in via the EIS relief scheme is liquidated and the proceeds are less than your original investment, you can reduce those losses by offsetting them against your current income tax bill or the previous year.

Who should consider investing in EIS?

We believe wealthy, experienced investors with diversified investment portfolios should consider investing in EIS companies. However, this type of investment is not for everyone, particularly those new to investing.

What is the difference between EIS and VCTs?

While EIS and Venture Capital Trusts (VCTs) are similar in many ways, there is one clear difference between the two. Anyone investing through a Venture Capital Scheme has to hold the company’s shares for five years to receive 30% income tax relief. That’s compared to the three years required when making EIS investments.