Discover the benefits of Enterprise Investment Scheme tax relief and decide if the EIS is right for you.
What are EIS investments? Learn about how the Enterprise Investment Scheme (EIS) works and the tax benefits you, as an investor, can receive. We also discuss the qualifying criteria for both the UK businesses that benefit from your investment and the SME investors who could reap income and capital gains tax relief, among other benefits.
What is the Enterprise Investment Scheme (EIS)?
The EIS (Enterprise Investment Scheme) first appeared in 1994. The initiative was launched to boost the economy by encouraging investment in small early-stage UK companies.
As an investor, if you invest in an EIS-qualifying company and it becomes successful, you could receive significant tax breaks. Companies eligible for EIS investment generally have gross assets under £15 million at the time of investment and employ fewer than 250 people. However, knowledge-intensive firms now benefit from more flexible rules.
What Companies Typically Qualify for EIS Investment?
Companies across a broad range of sectors and industries can qualify for the Enterprise Investment Scheme. While there are more specific criteria for a company seeking EIS investment, it must be small, in the early stages of its life, and carry out a qualifying trade.
While most trades are accepted, some are excluded from the EIS investment scheme. For example, those in the finance, insurance, or real estate sectors will not qualify.
What are Knowledge Intensive Companies?
A company that is researching or developing something innovative or groundbreaking is considered a knowledge-intensive company and, therefore, gets preferential treatment. A company that manufactures and sells fishing rods is an example of a regular business that is not classed as a KIC.
What are the Tax Benefits for EIS Investors?
- Income tax relief of up to 30%
- Tax-free growth on your investment
- Capital gains deferral
- Potential inheritance tax relief
- Loss relief upon exit
Keep in mind that tax rules may change, and the benefits depend on your personal circumstances. Furthermore, the EIS tax perks are only available if the company retains its EIS status.
What is the Maximum Investment I Can Make Through EIS?
You can invest up to £1 million per tax year or up to £2 million if the amount above £1 million is allocated to ‘knowledge-intensive’ investments. While it’s possible to invest more, only the first £1-2 million qualifies for income tax relief. However, any excess investment may still qualify for capital gains deferral and inheritance tax relief.
Can I Build a Portfolio of EIS Investments?
There are two methods investors use to participate in the EIS scheme:
- Invest directly in an EIS company
- Invest in an EIS fund that builds a portfolio for you
The Pros and Cons of Investing Directly into EIS
Direct investment provides greater control but carries higher risk since it relies on the performance of a single company.
The Pros and Cons of Investing in an EIS Fund
EIS funds spread risk across multiple companies and are managed by experts, but they involve fees and reduced control over investments.
How Long Until I Can Claim EIS Income Tax Relief?
Once you have purchased and received your EIS shares, you can start claiming 30% income tax relief for either the current or previous tax year, provided you hold the shares for at least three years.
What are the Biggest Risks With EIS Investments?
EIS investments are high risk, with many startups failing within three years. Additionally, selling EIS shares is difficult as they are less liquid than publicly traded stocks.
A Closer Look at the EIS Tax Benefits
EIS Income Tax Relief
Investors can claim up to 30% income tax relief on up to £1 million per tax year, or £2 million if investing in knowledge-intensive companies.
Capital Gains Tax Relief
Any growth in the value of your EIS investment is tax-free if shares are held for at least three years.
Capital Gains Deferral Relief
CGT deferral allows investors to reinvest gains from other assets into EIS-qualifying companies and defer tax payments.
Inheritance Tax Relief
EIS shares qualify for 100% inheritance tax relief if held for at least two years before death.
Loss Relief
If an EIS investment fails, investors can offset losses against their income tax or capital gains tax bill.
How to Invest in the Enterprise Investment Scheme
To invest, identify a qualifying early-stage company, verify its EIS status, and purchase shares upfront in cash.
How to Claim EIS Tax Relief
The company must submit an EIS1 form to HMRC. Once approved, investors receive an EIS3 form, which they use to claim tax relief via self-assessment.
Other Venture Capital Schemes
Seed Enterprise Investment Scheme (SEIS)
SEIS is similar to EIS but focuses on startups, offering 50% income tax relief and lower investment thresholds.
Venture Capital Trusts (VCTs)
VCTs invest in multiple companies, providing diversification and tax benefits similar to EIS, but they operate as publicly listed entities.
Should You Invest in the Enterprise Investment Scheme?
The EIS is best suited for high-net-worth investors willing to lock away funds for a long period. Consult a financial advisor before investing.
