EIS Rules and Benefits for Investors Explained

Background to the Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme was introduced by the UK government in 1994 to support investment into early-stage companies. The scheme is intended to support qualifying small and medium-sized enterprises in raising equity finance by offering tax reliefs to investors who subscribe for new shares.

Early-stage companies often face challenges in accessing external funding due to limited trading history and higher business risk. The Enterprise Investment Scheme is designed to facilitate investment into such companies by providing tax reliefs to investors, subject to eligibility and ongoing compliance with the relevant rules.

The scheme operates alongside other government-supported investment initiatives and is intended to support businesses, investors and wider economic activity.

Related Government-Supported Investment Schemes

Other schemes operating alongside the Enterprise Investment Scheme include:

Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme is aimed at earlier-stage companies than those eligible for EIS. It offers a higher rate of income tax relief, subject to lower maximum investment limits and additional qualifying conditions.

Venture Capital Trusts (VCTs)
Venture Capital Trusts are listed investment companies that invest in smaller UK businesses. VCTs offer different tax treatments to EIS and are subject to their own rules and holding period requirements.

Each scheme operates under separate legislation and eligibility criteria, and investors should consider the differences carefully.

EIS Rules for Investors

The eligibility criteria for investors under the Enterprise Investment Scheme remain unchanged from April 2026. To access EIS tax reliefs, investors must meet specific conditions set out by HMRC. Where these conditions are satisfied, an investor may subscribe for shares in qualifying companies and may be eligible to claim certain tax reliefs, subject to individual circumstances.

Investor Eligibility Criteria

To qualify for relief under the Enterprise Investment Scheme, investors must meet the following conditions:

• The investor must be subject to UK income tax.
• The investor must not be an employee or a paid director of the company.
• The investor must not control more than 30% of the company’s shares or voting rights.
• There must be no linked loans between the investor and the company within the relevant period.
• The investment must be made for commercial reasons and not primarily for tax avoidance purposes.

EIS tax reliefs are always subject to change and have been multiple times over the years. It is necessary to refer to the government website for the most up-to-date information on these schemes.

Investment Criteria for EIS Shares

Investments made under the Enterprise Investment Scheme must also meet specific requirements:

• Shares must be fully paid for in cash at the time of issue.
• Shares must be held for a minimum period of three years to retain the associated tax reliefs.
• Investment limits apply, including an annual limit of £1 million per investor, increasing to £2 million where at least £1 million is invested in qualifying Knowledge Intensive Companies.

Compliance Statement and Advance Assurance

Before issuing EIS-qualifying shares, a company may apply to HMRC for advance assurance that it is likely to meet the requirements of the Enterprise Investment Scheme.

Once shares have been issued, the company must submit a compliance statement to HMRC. If accepted, HMRC will authorise the issue of EIS certificates to investors, which are required to claim tax reliefs.

EIS Shares and Investment Considerations

Investors subscribing for shares under the Enterprise Investment Scheme receive newly issued ordinary shares. These shares must be paid for upfront and carry the investment risks associated with early-stage companies.

Key considerations include:

• Shares must be newly issued and subscribed for directly from the company.
• The company must use the funds raised for qualifying business activities within the required timeframe.
• Investors should retain the relevant compliance documentation issued by HMRC.

Tax Reliefs Available Under the Enterprise Investment Scheme

Investments made under the Enterprise Investment Scheme may be eligible for a number of tax reliefs, subject to eligibility, holding periods and ongoing compliance.

Income Tax Relief

Income tax relief of up to 30% of the amount invested may be available, subject to annual investment limits and sufficient income tax liability.

Key conditions include:

• Shares must generally be held for at least three years.
• The company must continue to meet EIS qualifying conditions.
• Relief may be claimed in the year of investment or carried back to the previous tax year.

Capital Gains Tax Exemption

Gains arising on the disposal of EIS-qualifying shares may be exempt from capital gains tax, provided the relevant conditions are met.

Key conditions include:

• The minimum holding period must be satisfied.
• Income tax relief must have been claimed on the shares.
• The company must remain qualifying throughout the holding period.

Capital Gains Deferral Relief

Capital gains arising on the disposal of other assets may be deferred where the gain is reinvested into EIS-qualifying shares, subject to HMRC rules.

Key points include:

• Gains may be deferred if reinvested within the permitted timeframe.
• There is no upper limit on the amount of gain that may be deferred.
• Deferred gains become chargeable when the EIS shares are disposed of or cease to qualify.

Inheritance Tax Relief

EIS-qualifying shares may be eligible for business relief for inheritance tax purposes, subject to the relevant conditions being met.

Key conditions include:

• Shares must generally be held for at least two years.
• The company must qualify for business relief at the time of transfer.

Loss Relief

Where an EIS investment results in a loss, loss relief may be available. Relief is calculated on the amount invested after deducting any income tax relief already received.

The relief may be set against income tax or capital gains tax, depending on individual circumstances and HMRC rules.

Claiming EIS Tax Reliefs

Tax reliefs are claimed through an investor’s self-assessment tax return, supported by the relevant EIS certificates issued by HMRC.

Different reliefs may require additional forms or disclosures, depending on the type of relief being claimed.

EIS tax reliefs are always subject to change and have done multiple times over the years. It is necessary to refer to the government website for the most up to date information on these schemes.

Changes Affecting EIS-Qualifying Companies from April 2026

• Changes introduced from April 2026 primarily affect companies seeking funding under the Enterprise Investment Scheme rather than investors directly.
• These include increases to the maximum amounts companies may raise annually and over their lifetime, as well as changes to certain asset thresholds.
• Companies must continue to meet all existing qualifying requirements for investments to remain eligible for EIS relief.

Knowledge Intensive Companies (KICs)

Knowledge Intensive Companies are subject to additional qualifying criteria and may be eligible for higher investment limits under the Enterprise Investment Scheme.

KIC status is determined by HMRC based on specific conditions relating to innovation, research and development expenditure, and employee qualifications.

Key Considerations

Investments made under the Enterprise Investment Scheme involve a high level of risk, including the risk of total capital loss. Tax reliefs depend on individual circumstances and may change. Past performance is not a reliable indicator of future results.

Investors should ensure they fully understand the scheme, the risks involved and the relevant eligibility criteria before investing, and may wish to seek independent professional advice.

Important Information – This article is provided for information purposes only and does not constitute investment advice, tax advice, or a personal recommendation. You should not rely on this information when making an investment decision. Tax reliefs are subject to legislation, may change, and depend on individual circumstances. Eligibility for EIS/VCT reliefs depends on the company continuing to meet qualifying conditions and may be withdrawn. EIS and VCT investments are high-risk, illiquid, and you may lose some or all of your invested capital. These investments are not suitable for all investors and are not comparable to cash savings products. You should seek independent financial and tax advice before investing.