EIS Investment Relief – The Tax Breaks and Other Incentives

An Introduction to the Enterprise Investment Scheme (EIS)

Launched in 1994, the Enterprise Investment Scheme (EIS) is a UK-government-led initiative that was created to give incentives to angel investors that invest in early-stage businesses. 

Those incentives come in the form of EIS tax reliefs. Should investors put their money into a small business with high growth potential, they can claim income tax relief and capital gains tax relief, among other reliefs. 

The list of EIS tax reliefs in full:

• Income Tax Relief
• Capital Gains Tax (CGT) Relief
• Capital Gains Deferral
• Loss Relief
• Inheritance Tax Relief

Why Consider Investing in the Enterprise Investment Scheme

If you’re looking for one of the best ways to significantly increase your personal wealth, investing in shares of a small business is one of the best options. That is, of course, if that small business goes on to enjoy big growth. The earlier you put your money in, the quicker it can start to work for you. 

However, no investment comes without risk, and that is certainly the case when investing in early-stage businesses. While there’s a chance you can profit greatly, there’s also the chance that you’ll not profit at all and even lose money.

Essentially, it’s a bit of a gamble. However, it could pay off if you do your due diligence properly and believe in a small company. If it does, you’ll get paid off from the investment and also earn the tax breaks on top. 

If it fails, you at least have loss relief to fall back on – more on that shortly. 

A Closer Look at the EIS Tax Reliefs

Would investors consider supporting high-risk but potentially high-reward smaller businesses without some incentives? Not the savvy ones, that’s for sure. 

The UK government knows this but also knows the success of as many of these companies as possible is important to the growth of the economy. Therefore, through the Seed Enterprise Investment Scheme and other initiatives, the government provides investors with preferential tax treatment. 

Let’s dissect the tax relief available to those investors who participate in the EIS scheme:

Income Tax Relief – Up to 30% Off Your Income Tax Bill

Widely known as the most attractive EIS tax reliefs, income tax relief is available to investors holding EIS shares for at least three years. The tax relief is capped at £1 million per tax year, although that’s doubled to £2 million if investments are made in knowledge intensive companies. 

That means, if you have sufficient income tax liability to cover it, you could save up to £300,000 or £600,000 (if a KIC) on your tax bill. 

Capital Gains Tax Relief – Tax-Free Growth

On top of the income tax relief you receive, investors can enjoy tax-free growth should the EIS investment pay off. Any gains made from the sale of EIS shares are exempt from capital gains tax. 

If you do the math, that’s some considerable tax savings. Depending on your income tax band, you’d normally have to pay 10% (basic) or 20% (higher) CGT on any gains made from investments. 

Therefore, a gain of £200,000 would usually be subject to capital gains tax of £20,000 or £40,000, respectively. 

Capital Gains Deferral

The EIS scheme can also prove a handy tax management strategy. Should you make gains from selling other assets, you can claim capital gains deferral relief by investing those gains into an EIS-qualifying company.

Those gains remain deferred for as long as they remain invested. You’ll only qualify for CGT deferral relief if you invested in the EIS scheme no earlier than 12 months prior and 3 years after that initial gain was made. 

Loss Relief

While the above EIS tax reliefs sound amazing, you’re only going to benefit if your EIS investment proves successful. It is worth reminding ourselves that tax relief aside, these are high-risk investments that are as likely to fail as they are to succeed.

That’s why the UK government also provides loss relief to mitigate some of the losses of qualifying investors when their investments go south. Loss relief allows an investor to offset a loss against their capital gains tax or income tax bill. 

You’ll only qualify for loss relief if your investment has fallen below what’s called its effective cost. That’s the sum total of your investment minus the income tax relief already claimed. For example, if you invested £200,000 and received 30% (£60,000) income tax relief, the effective cost is £140,000.

Inheritance Tax Relief

While not as glamorous as the other EIS benefits (at least not for the investor personally), the final incentive is inheritance tax relief. 

If you’ve held EIS shares for at least two years, they are 100% exempt from inheritance tax. A savvy investor might consider the Enterprise Investment Scheme as a good strategy should they wish to funnel their wealth onto loved ones at the time of their passing. 

What Companies Qualify for the Enterprise Investment Scheme

Small early-stage companies often require investment if they’re to stand a chance of survival and growth. Therefore, many have opted to participate in schemes like the Enterprise Investment Scheme (EIS) or the similar Seed Enterprise Investment Scheme (SEIS).

To become an EIS-qualifying company, there are specific requirements they must first meet. We’ll dive into those below:

• The company must have made its first commercial no more than 7 years ago.
• The business must not employ more than 250 full-time employees.
• The company cannot have gross assets worth £15 million or more. 
• It cannot be listed on any stock exchange. 
• The company must offer a qualifying trade. 

For the last requirement, there are specific trades that qualify and others that don’t. A company should be fine as long as they’re not performing trades such as the following:

• Property development
• Offering banking, insurance, or financial loans
• Providing legal or accounting services
• Dealing in land or commodities
• Working in the energy sector

Any company that qualifies must also provide investors with a compliance statement. Without it, investors will not be able to claim the tax benefits they are entitled to when filing their tax returns. 

Qualifying as a Knowledge Intensive Company

A knowledge intensive company is an early-stage business that’s been given a special status in the EIS investment scheme. 

That status is given because the company is regarded as a higher risk due to performing research, development, or innovation. The government greatly emphasises attracting investment for a KIC, as it could create something groundbreaking that would immensely benefit the country and its economy. 

As the risk is greater for investors when investing in a KIC, the EIS tax reliefs are also more substantial. 

How Does a Company Qualify as Knowledge Intensive?

An EIS-qualifying company hoping to qualify as a KIC must:

• Spend at least 15% of its operating costs on research, innovation, or development. 
• An exception is if the company has spent at least 10% of its operating costs in those areas across the previous three years. 
• At least 20% of your full-time staff must be qualified at a Master’s level or above, and they must be performing a role that befits their qualifications. 

What are the EIS Benefits for an EIS Company 

Investment from initiatives like the EIS and SEIS are sometimes the difference between young businesses surviving or failing. A company that can claim EIS relief could receive investment of up to £5 million per year and up to £12 million across its lifetime. 

The scheme has proved popular and is also a lifeline for many companies that would have failed without EIS investment. In 2022-23, over 4,200 UK-based companies received investment via the EIS. Between them, they received just under £2 billion worth of investment. 

What about knowledge intensive companies? Businesses classed as KIC are eligible for even more investment. They can receive up to £10 million in a tax year and up to a maximum of £20 million across their lifetime. 

How to Apply for the EIS as an Investor

Before participating in the Enterprise Investment Scheme, you’ll need to ensure you qualify as an investor. While there are not as many requirements as there are for small businesses, there are still some you’ll need to be aware of. 

There are certain requirements, such as:

• You must be a UK taxpayer.
• Your investment must be made in cash and paid upfront.
• The shares you purchase must be newly listed full risk ordinary shares.
• You cannot be employed by the company or have a vested interest.
• You’ve not invested in the company prior to purchasing EIS shares.
• You cannot have more than a 30% stake in the company. 

As for the steps required to invest:

There are various steps you must take if you want to invest via the EIS scheme. 

First, you’ll want to identify early-stage EIS-qualifying companies in which you’re ready to invest. This step alone should take plenty of time as you perform proper due diligence. Rushing into any investment without doing your homework is a recipe for disaster. 

Once you’ve decided, you’ll want to make sure the company has received EIS assurance from the HRMC that it meets the basic requirements to qualify for investment through the scheme. Once EIS assurance has been established, you’ll be free to start negotiating with that business.

You can now purchase the EIS shares. Following that, the only thing left is to monitor your investment and hope it succeeds. 

What are Alternative Investment Schemes

There are various other schemes you might consider as an alternative to the Enterprise Investment Scheme. One is the Seed Enterprise Investment Scheme, while another option is Venture Capital Trusts. 

The Seed Enterprise Investment Scheme

Similar to its sister scheme, SEIS, the EIS offers attractive tax incentives to investors willing to support smaller companies with growth potential. There is a difference between the two schemes, at least with regard to the types of companies that receive investment.

SEIS focuses on new start-ups, which means there is greater risk when investing. However, that increased risk is offset by increased tax benefits for investors.

Income tax relief is now up to 50%, while you’ll receive the same CGT relief when making gains on your EIS-qualifying shares. CGT deferrals, loss relief, and inheritance tax relief are also provided to investors. 

Venture Capital Schemes

Another option is to invest in Venture Capital Trusts. These offer similar tax breaks but fewer risks as you’re investing in a portfolio of companies rather than one or two. 

The benefits in full when investing:

• You can claim relief on your income tax bill of up to 30% on investments of up to £200,000 per year.
• Your VCT investments are free from capital gains tax.
• You also receive tax-free dividends when making VCT investments.

Is the EIS Right for You?

As with any investment, EIS investments carry inherent risks, and the value of your shares can fluctuate significantly. You might end up with more or less than your initial investment or potentially lose it all. Investing in early-stage businesses, however, comes with an even higher level of risk compared to more traditional investment types.

For that reason, we recommend only experienced investors who have the financial stability to absorb any losses consider the scheme. If you’re new to the world of investments, we recommend you start with less volatile investments before venturing into the Enterprise Investment Scheme.