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Enterprise Investment Scheme Relief – An Investors Guide
Investing in small companies carries big risks, and the UK government knows it. While there’s a chance the smaller start-up you invest in grows and increases the value of your investment, there’s as much chance of the opposite happening.
That’s why they’ve launched initiatives such as the Enterprise Investment Scheme, which offers investors a range of lucrative tax benefits in return for their investments.
Those tax breaks are incentives to help convince investors to take the plunge and invest in early-stage UK companies that represent a higher risk than other investment opportunities.
Those who take the higher-risk investment approach can look forward to income tax relief and capital gains tax exemption. Plus, the EIS gives you the ability to receive CGT deferral relief, while there’s also loss relief to help soften the blow from any failed investments.
What is the Enterprise Investment Scheme (EIS) – a Quick Glance
The Enterprise Investment Scheme is one of several UK initiatives to encourage investment in young and small companies and, therefore, boost the country’s economic growth. Other schemes include the Seed Enterprise Investment Scheme (SEIS) and the Venture Capital Trust.
Did you know? Both the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) scheme were both set to expire in April 2025. However, the decision to extend the investment schemes for another 10 years was made in September 2024. That’s great news for any of you investors that thought you might miss out on the tax relief both provide.
Those investing via EIS can take advantage of the following tax reliefs:
- Up to 30% income Tax Relief
- CGT Exemption
- Capital Gains Deferral
- Loss Relief
- Inheritance Tax Relief
How the EIS Scheme Works
Any early-stage EIS-qualifying company can receive lifetime investments of up to £12 million from the Enterprise Investment Scheme. However, it cannot receive more than £5 million in a single tax year. That limit includes any investments received from other venture capital schemes. The investment must come within 7 years of the company’s first commercial sale.
If the company qualifies as a knowledge-intensive company (more on this later), the amount of investment it can receive increases. It can be up to 10 years since it made its first commercial sale and can receive up to £10 million per year and lifetime investments of up to £20 million.
EIS Tax Reliefs Explained
Those tax reliefs help to offset the risk of investing in high-risk start-ups, and below, we’ll show you how.
Income Tax Relief – Up to 30% on Your Investment
One of the biggest incentives given to angel investors is the up to 30% income tax relief they can claim. That 30% is of the amount you’ve invested, which can be up to £1m (or £2m if investment is made in knowledge incentive companies) per tax year.
That’s a potential saving of £300,000 per year if you invest the maximum amount in EIS-qualifying companies. It’s also assuming you have the tax liability to cover that reduction. The only stipulation is that you have previously held the EIS shares you bought for a minimum of three months.
Knowledge Intensive Companies (KIC)
If risk is your middle name, you might even consider investing in a knowledge-intensive company to receive even greater tax relief. A KIC has a special status with the HRMC, allowing it to receive more investment from the EIS fund.
The reason is that a KIC is a company that carries out research, development, or innovation. For example, a young company that is developing a ground-breaking medication or treatment would qualify as a knowledge-intensive company.
If you want to invest more than the maximum of £1 million, which is usually allowed, you can do so if anything above that original million is invested in a KIC. You can invest up to another million per year above your original EIS investments as long as that investment goes into KICs.
All told that means you could claim income tax relief of up to £600,000 if you invest the maximum possible through the scheme.
Capital Gains Tax Relief
An investor hopes every investment succeeds, but if that happens with an EIS investment, there’s double the reason to celebrate.
If you’ve held EIS shares for three or more years and sell at a gain, that gain is tax-free. You will not have to pay the usual capital gains tax, which can be up to 24%, depending on your tax band.
That is a huge saving no matter the size of your investment, but if your gains are something like £1 million, we’re talking about saving up to £240,000 that’d usually be earmarked for CGT.
Capital Gains Tax Deferrals
Another big benefit of the EIS is the capital gains deferral it provides. If you’ve sold other assets at a gain and want to avoid or hold off paying capital gains tax, the scheme gives you the ability to do just that.
Capital gains tax (CGT) can be deferred by reinvesting the gain into shares of an EIS-qualifying company. To qualify, the investment must be made within a specific timeframe. That’s either up to one year before or within three years following the date the gain was realised. That gain is deferred for as long as the money gained remains invested.
Inheritance Tax Relief
Probably the least known tax relief offered through the EIS scheme is inheritance tax relief. That is probably because it will not benefit the investor directly.
Any EIS-qualifying shares held by the investor for at least two years are exempt from inheritance tax. Considering the inheritance tax is currently 40%, there are some huge savings to be had for your beneficiaries.
Loss Relief
To help soothe the pain of a losing investment, the Enterprise Investment Scheme also provides investors with loss relief. It will not wipe out losses completely but can reduce them significantly.
If a company fails or your shares are sold at a loss, you can choose to set the amount of loss against their income tax of the current or previous tax year. The loss relief you receive is minus the income tax you’ve already recouped.
Who Qualifies for the Enterprise Investment Fund?
if you’re a high-worth individual, there’s a strong chance you qualify for the EIS scheme as an investor. There are some criteria to take note of, however:
- The investment must be in newly issued shares, paid for in cash and in full at the time of purchase.
- You must pay income tax in the UK
- You cannot have a substantial interest in the EIS companies you invest in. That means owning more than a 30% stake in the companies.
- You must not be an employee. You can be a director but only if you do not receive a salary or any other employment-related benefits.
If you and your potential investment tick those boxes, you’re free to invest. Just note that to claim EIS relief, you must first hold a company’s EIS shares for a minimum of three years.
Why Invest in the Enterprise Investment Scheme?
Aside from the obvious reason for preferential tax treatment, there are many other reasons to consider an EIS-qualifying investment. We’ve listed a few of them below:
High Growth Potential
While there’s clearly a lot of risk with this type of investment, there’s also the potential for huge growth. If a company you have invested in takes off, the value of your investment could balloon.
Add in the income tax relief and tax-free growth provided by paying no CGT; the right investment could prove life-changing.
Helping New Start-ups and the UK Economy
Aside from the potential to make massive gains and claim EIS tax reliefs, there’s also the potential for a moral victory. A successful investment will help a young company to grow.
That means more jobs for people and an important boost to the UK economy.
To Diversify Your Investment Portfolio
Another reason to consider an EIS investment is to diversify your portfolio. Smaller companies often operate on different investment cycles compared to other sectors of the market. For investors who are comfortable with the associated risks, EIS investments can provide an additional opportunity to diversify their portfolio.
Diversification spreads your risk so that the performance of one investment does not always dictate the success of your entire portfolio. Think of the term ‘hedging your bets’. Rather than putting all your eggs into one big investment basket, you spread many smaller investments around.
Eligibility Requirements for a Business Looking for EIS Investment
To become an EIS-qualifying company, a business must meet the following criteria:
- UK-based: Any company wishing to receive investment from the EIS fund must be trading in the UK or at least have a permanent establishment here.
- Not listed: The company will not qualify if it is listed on any stock exchange.
- Must undertake a qualifying trade: The HRMC has a long list of trades that do not qualify for its venture capital schemes. This includes activities such as property development and insurance.
- Independently owned: Any company owned by another company or has a significant stake owned by another company will not qualify for the EIS.
- Must be a young company: Only companies that made their first commercial sale within seven years prior to selling their shares will qualify for the Enterprise Investment Scheme.
On top of those criteria, a company must have less than 250 employees and gross assets of no more than £15 million.
How to Invest in the Enterprise Investment Scheme
You can take three main routes if you want to invest in the EIS scheme. Assuming you’ve identified some EIS investment opportunities, those routes are:
Direct Investments
This is handling the investment yourself and without the help of any intermediaries. This is a route we only recommend for highly experienced investors. You’ll need to perform a high level of due diligence, which can take time, and you’ll also need to know what you’re doing.
Co-Investment Platforms
A safer route for lesser-experienced investors is to use co-investment platforms. These sites do a lot of the work for you. They find and research investment opportunities for investors to consider.
Certain platforms focus on venture capital investments, which may qualify for EIS if the portfolio companies meet the required criteria. These platforms also cater to diverse investor profiles by varying their levels of due diligence and engagement.
If you’re thinking about this route, it’s important to find the right co-investment platform. Some have stricter selection criteria when sounding out investment opportunities. Others may have higher minimum investment requirements than others.
EIS Funds
A final option is to pledge your money to an EIS fund that’s overseen by an experienced investor acting as a fund manager.
You commit your investment to the fund manager, and he makes investments across a portfolio of EIS-eligible companies on your behalf. An EIS fund could see your money invested in up to 8 individual companies at one time.
This route is another that will suit less experienced investors or those who want to leave their investments in the hands of somebody else. The downside is that there are upfront and recurring fees that you’ll have to pay for the privledge of investing your money.
Are EIS Investments Worth It?
The Enterprise Investment Scheme certainly has potential benefits for you and the companies looking to raise capital. That said, we strongly suggest you seek expert financial advice before investing. Not just about the particular investment you’re interested in, but also about the aforementioned routes to take.
When investing through EIS, you’re investing in smaller businesses in the early stages of their existence. There is as much chance of the company failing and losing you money as there is it growing and increasing the value of your investment.
