How to Make an EIS Investment – Your Options

The Main EIS Investment Methods – How You Can Invest

Private investors interested in the Enterprise Investment Scheme in the UK have a wealth of opportunities available at any time. These span countless sectors and providers, offering many options depending on the level of long-term growth you’re after.

However, EIS investments are usually accessed through one of three main routes:

1. Making EIS investments directly
2. Using co-investment platforms
3. EIS funds

Which you choose will usually come down to the level of investment experience you have and the level of risk involved. Below, we take you through each of the options in more detail.

Direct EIS Investments

Direct EIS investments are the “go it alone” route without any help from third-party intermediaries. You’ll research EIS-qualifying companies seeking capital and decide whether you think the investment is good over the long term.

While the EIS will provide support, guidance, and advice, this route is better suited to experienced investors. It is generally taken by High Net Worth Individual investors who have extensive experience with venture capital trusts and schemes.

This path could prove high risk for anyone else, especially if adequate due diligence has not been followed.

Investing Through Co-Investment Platforms

Those wanting to avoid the higher risk of direct Enterprise Investment Scheme investments might consider using a co-investment platform instead. These platforms perform much of the due diligence on EIS-qualifying companies for you.

They source, structure, and advertise EIS investment opportunities you can browse, consider, and choose from. The criteria a co-investment platform uses when vetting opportunities will differ, with some placing a high level of analysis and research into their listings.

When considering co-investment platforms, you’ll want to establish whether minimum investment amounts are required, any fees, and their track record and reputation.

Investing via EIS Funds

The final route, popular with those looking for a lower-risk way of investing in the Enterprise Investment Scheme (EIS), is to do so via EIS funds. Rather than purchasing the EIS shares directly, you pledge capital to a fund manager who uses that capital to invest across a portfolio of EIS-qualifying companies.

Fund managers will have portfolios containing five, eight, or even more companies they believe are sound investment opportunities. You’re leveraging the experience and due diligence of the professional manager, making it a good option for less experienced investors.

Another reason this route is good for beginners is that your investment is spread across numerous companies rather than one. If one of the companies fails, it’s not the end of the world, as it might be using one of the previous EIS investment methods.

The downsides to this type of investment are the upfront and recurring fees. That might prove unappealing for anyone looking to maximise profits from an investment.

Minimising the Risks of Enterprise Investment Scheme Investments

Once an investor has decided how they will go about making their new investments, the next step is to consider certain tools and techniques that can help minimise the risks of those investments. Risks are involved no matter which route you take, although some offer higher risk than others.

There is a wide range of techniques you can use to minimise the risks of your EIS investment, but the main ones are:

1. Making use of any available EIS tax reliefs.
2. Finding opportunities backed by venture builders.
3. Conducting high levels of due diligence.

Making Use of Any Available EIS Tax Reliefs

The state-aid-approved Enterprise Investment Scheme offers some of the best tax reliefs investors will find in the venture capital sphere. For a start, investors can look forward to 30% income tax relief, capital gains tax relief, and CGT deferral relief. Additionally, other EIS tax reliefs include inheritance tax relief and loss relief.

These tax incentives encourage investors to participate in this government-backed Enterprise Investment Scheme, a dream come true for many smaller businesses seeking investment. Money raised by this scheme can help small businesses succeed, which, in turn, is fantastic for the UK economy.

Allowing investors to claim income tax relief of up to 30% essentially negates a third of any risk involved. That income tax relief is available once an investor has held the EIS shares of an EIS-qualifying company for at least three years.

Furthermore, loss relief is there to minimise any losses if a company fails. While this will not cover all the losses from the disposal of your EIS shares, it will greatly reduce them. Alongside the aforementioned tax relief benefits, the EIS also supports investors in managing existing capital gains tax bills with benefits such as capital gains deferral relief.

Finally, there is inheritance tax relief that ensures your beneficiaries will not have to pay tax on the sale of your EIS shares as long as you’ve held them for two years or more.

Finding Opportunities Backed by Venture Builders

To make the most of the above income tax relief and other EIS tax reliefs, you’ll want to do your best to find an investment opportunity that stands a better chance of success. In many cases, you’ll have a better chance seeking opportunities launched by venture builders.

A venture builder is a company that specialises in helping smaller businesses and start-ups to succeed. Often called start-up factories, these companies have a lot of experience in creating, launching, and building other companies.

While you’re not obliged to find an EIS-qualifying company that is backed by a venture builder, those that are generally encourage investment from investors. This is because a venture builder-backed company can mitigate the risks of an investment quite substantially. The company is supported by those who know how to create successful businesses, which is good news for anyone looking to make an initial investment.

Conducting High Levels of Due Diligence

No matter the level of experience you have with investments, conducting due diligence will always be one of the most important aspects of the investment process. While you’re somewhat protected by income tax relief, CGT deferral relief, and other EIS tax relief benefits, there’s always risk with this type of investment.

You’ll want to identify any potential weaknesses of an investment opportunity and examine every aspect of the business, including gross assets, competitors, the people running it, the financiers involved, and everything else.

If you’ve chosen to use co-investment platforms or EIS funds as your method of investing, due diligence also comes into play. Ensuring that platforms employ sophisticated processes for researching, vetting, and selecting opportunities, along with having a proven track record in the field, can help maximise investor confidence in the legitimacy and growth potential of these opportunities.

Getting Right the Timing of EIS Investments

Investing in an EIS company is a medium to long-term investment, so the timing of your investment is key. Before you can claim income tax relief on your investment, you’ll have to hold the company’s shares for a minimum of three years. That is the same length of time required before you can take advantage of capital gains tax relief when selling the shares.

You may even decide to hold on to the shares if the investment continues to succeed. The average exit window for EIS investments is usually between five and ten years. Therefore, as the investment is a long-term commitment, timing is everything.

There’s no point rushing into an investment as you chase tax-free growth, but at the same time, you do not want to hold back and miss a good opportunity.

Ultimately, understanding the average exit windows, minimum holding periods, and the many flexible tax advantages should allow you to establish when the best time for an investment is, especially with regard to your personal investment goals and current tax circumstances.

The Bottom Line

If you’re looking for a long-term investment and are attracted by the income tax reliefs of the EIS scheme, you’re probably wondering how to go about it. In our guide above, we’ve provided the methods you can use to invest in early-stage businesses and how to minimise any risks.

Whether for income tax purposes, capital gains over the long term, or investment growth targets, the EIS scheme is a fantastic option. However, as with any other type of investment, there are risks involved, so use our guide to understand the right way to go about such an investment.

EIS Investment FAQs

Are there alternatives to the Enterprise Investment Scheme?

Yes, there is the Seed Enterprise Investment Scheme (SEIS), which is similar to EIS but also riskier. That is because SEIS is for investments in start-ups rather than small businesses. In return for the higher risk, investors can claim income tax relief of up to 50%. The Social Investment Tax Relief program used to be a good option, but it stopped taking investments back in 2023.

Are venture capital trusts a better option than the EIS?

A VCT (venture capital trust) or other venture capital schemes are another good alternative to EIS investments. With VCTs, you’re investing in London Stock Exchange-listed companies that specialise in making investments into early-stage businesses and small companies. An investment trust offers safer investment opportunities for less experienced investors.

What are the main benefits for an investor in the EIS scheme?

Investors are encouraged to participate in the Enterprise Investment Scheme (EIS) through tax relief benefits. When you buy EIS shares, you can claim 30% income tax relief once you’ve held them for at least three years. Furthermore, you’re given capital gains tax relief on any profits made, capital gain deferral relief, loss relief, and inheritance tax relief.

Who can make an Enterprise Investment Scheme (EIS) investment?

Any High Net Worth Individual who is not affiliated with, employed by, or invested in a specific company in the EIS scheme can make an investment and receive income tax relief, capital gains tax relief, and other EIS tax relief benefits.

How does EIS investment work?

When you invest in an EIS fund, you acquire shares in the underlying companies. Since these shares are typically not listed, you usually cannot sell them on the stock market. You can only realise your investment when there is an exit, such as when the company is sold, listed on a stock market, or refinanced.

Should I make Direct EIS investments or use an EIS fund?

Which you choose will depend on your investment experience. Direct investments are not always a good choice for those making their first EIS investments. Investing in an EIS fund carries lower risk, while another option is to use a co-investment platform.

Are EIS investments worth it?

An EIS investment always carries risk as you’re investing in small companies that may or may not succeed. However, you can claim EIS relief, which mitigates some of those risks. While some investments may fail, others could well, which is why due diligence is key.

What happens if my EIS investment goes bust?

If the proceeds from liquidation are lower than the initial investment, a loss occurs. This loss is diminished by any Income Tax relief that has not been withdrawn. You can offset the loss against your income in the same tax year of disposal or the year before.