Enterprise Investment Scheme Tax Relief – A Complete Guide for UK Investors

What Is The Enterprise Investment Scheme (EIS)?

Introduced by the UK government in 1994, the EIS encourages private investment into high-risk small and medium-sized enterprises (SMEs). It provides qualifying investors with various tax reliefs when they purchase shares in eligible companies. These tax advantages are designed to counterbalance the elevated risks associated with investing in unlisted and early-stage ventures.

Core EIS Tax Reliefs At a Glance

Let’s begin with a quick reference table of the main tax benefits offered through the Enterprise Investment Scheme:

These reliefs can significantly reduce the effective cost of investment and increase potential upside, particularly for high earners or those with capital gains to shelter.

How to Qualify for EIS Tax Relief

Investor Requirements for Potential EIS Tax Incentives

To claim EIS relief, you must:

• Be a UK taxpayer with a sufficient income tax liability
• Subscribe for new ordinary shares in an EIS-qualifying company
• Hold the shares for at least three years
• Not have a controlling interest (more than 30%) in the company
• Not be an employee (directors are allowed, provided they’re unpaid or receive only reasonable remuneration)

Investor and the company requirements below, are subject to change at short notice. Always make sure you’re up to date with any changes before proceeding. 

Company Requirements

A company must meet HMRC’s eligibility rules to receive EIS investment:

• Fewer than 250 employees (or 500 for Knowledge Intensive Companies)
• Less than £15 million in gross assets before the investment
• Be unquoted and not listed on the main London Stock Exchange or other recognised stock exchange
• Carry out a qualifying trade (not excluded by EIS rules)
• Be less than 7 years old (10 years for KICs) from the first commercial sale
• Not have exceeded the maximum amount of funding (£12m; £20m for KICs) under venture capital schemes

EIS Income Tax Relief

One of the main advantages of EIS is the 30% income tax relief available to investors. As long as you have sufficient liability, you can make significant savings on your income tax bill.

It will especially appeal to high earners who have enjoyed a profitable year and want to put their savings to good use. Furthermore, the ability to carry back relief to the previous tax year allows flexibility and forward-thinking in financial planning.

However, income tax relief is just the tip of the iceberg when it comes to the enticing tax incentives offered by the EIS.

Capital Gains Tax Deferral Relief

On top of the ability to claim income tax relief, investors are tempted into the Enterprise Investment Scheme through the prospect of CGT deferral relief. If you’ve sold a property, shares, or any other qualifying asset, you can defer the CGT tax bill through the EIS.

If you’ve made a gain from the sale of assets such as property or shares through the EIS, you can defer the capital gains tax on that amount by reinvesting it into EIS-qualifying shares. The gain can have been made up to three years before or one year after the investment. The deferred tax becomes payable only at the time you dispose of your EIS shares.

Tax-Free Capital Growth – Capital Gains Tax Relief

Provided you have claimed income tax relief and held your shares for a minimum of three years, you can look forward to capital gains tax exemption. You will not have to pay CGT on any gains made when disposing of shares. This allows investors to enjoy tax-free growth on successful investments. The condition, however, is that the company continues to meet the EIS qualifying criteria throughout the holding period.

Loss Relief

In the event your EIS investment underperforms or the company fails, EIS offers further protection in the form of loss relief. The net loss (minus income tax relief received) can be offset against either income in the current or previous tax year or capital gains. For high-rate taxpayers, this can significantly reduce the actual financial loss.

To illustrate this, let’s use an example:

You invest £75,000 and receive £22,500 in income tax relief. If the company fails, your effective loss is £52,500. If you’re in the 45% tax bracket, you may recover £23,625 by offsetting the loss, bringing the net loss down to £28,875.

Inheritance Tax Relief

After holding EIS shares for two years, they may become eligible for 100% inheritance tax relief. This is conditional on the shares still being held at the time of death and the company continuing to carry on a qualifying trade. For investors engaged in estate planning, EIS shares can be a valuable tool in passing on wealth free from the 40% IHT that’s usually due.

This makes EIS a dual-purpose vehicle. Not only does it support innovation and growth in UK SMEs, but it also reduces long-term tax burdens for future generations.

Important: All tax treatments mentioned in this guide are subject to change at any time and without warning. Moreover, the tax benefits are all unique to individual circumstances. 

Which Companies Qualify for EIS?

Early-stage companies that require funding to potentially ensure their future must meet HMRC’s eligibility criteria:

• Be less than 7 years old (10 for Knowledge Intensive Companies)
• Have fewer than 250 employees (or 500 for KICs)
• Not have gross assets exceeding £15 million before investment
• Carry on a qualifying trade
• Not be listed on the London Stock Exchange
• Certain trades are excluded (e.g., banking, insurance, legal services, property development). Subsidiaries must also qualify, and the company must not be controlled by another entity.

The Risks of EIS Investment

While the tax advantages are appealing, EIS investments carry notable risks. Please do not invest blindly. Speak to a qualified expert or financial specialist before committing your funds to the Enterprise Investment Scheme.

The most significant risks are:

• The high-risk nature of early-stage companies
• Illiquidity: shares are unlisted and harder to sell
• Tax reliefs can be withdrawn if the rules aren’t followed
• Long holding periods may not suit all investors

The Importance of Seeking Financial Advice

While the Enterprise Investment Scheme offers attractive tax reliefs, it also comes with complexity and risk. Every investor’s situation is unique. What works well for one individual may not be appropriate for another.

That’s why it’s vital to consult a qualified financial adviser or tax specialist before committing capital. An adviser can:

• Assess whether you have sufficient income tax liability to benefit from EIS reliefs
• Help you navigate CGT deferral and carry-back provisions
• Ensure your investment aligns with your risk tolerance, goals, and time horizon
• Confirm that the company or fund has advance assurance from HMRC
• Assist with paperwork and submission of EIS3 forms to claim relief correctly

How to Apply for EIS Tax Relief as an Investor

If you’ve taken expert advice and guidance and feel that the Enterprise Investment Scheme is a good option for you, there are specific steps you need to take to apply.

Identify a Qualifying Investment

Begin by finding a company (or EIS fund) that meets HMRC’s criteria for EIS qualification. Most businesses offering EIS will have applied for and received advance assurance from HMRC, which is a strong indicator that your investment will qualify for relief.

Make the Investment

Once you’re satisfied the company qualifies, you can invest by purchasing new ordinary shares. These must be fully paid in cash and not carry any preferential rights (such as fixed returns or priority access to assets).

Receive Your EIS3 Certificate

After the company has been trading for four months or has spent 70% of the funds raised, it will submit a compliance statement (Form EIS1) to HMRC. If accepted, HMRC will issue EIS3 certificates to investors, which will serve as your formal proof of eligibility for relief.

Claim Your Tax Relief

Once you receive your EIS3, you can claim your relief in one of two ways:

• Through your self-assessment tax return
• By submitting the EIS claim section of the EIS3 directly to HMRC

You can choose to apply the relief to the current tax year or the previous tax year under the carry-back rule.

The Takeaway

The Enterprise Investment Scheme remains one of the UK’s most compelling tax-efficient investment opportunities. While the risks are significant, the combination of income tax relief, CGT deferral, tax-free growth, and inheritance tax relief offers high-net-worth individuals and seasoned investors a powerful incentive to participate.

With careful planning and due diligence, EIS can be both a financial and strategic tool, supporting British innovation while strengthening your portfolio. That said, we strongly recommend that any would-be investor seeks advice from a professional advisor before making an EIS investment.

FAQ

Can I carry back EIS tax relief to a previous tax year?

Yes, you can apply income tax relief to the current or previous tax year.

What’s the minimum investment required?

There’s no statutory minimum, but many EIS funds set their own thresholds (often around £10,000).

Are dividends from EIS shares tax-free?

No, dividends are taxable in the usual way. Only gains on disposal (after holding for 3 years) are exempt. Just note that EIS shares cannot pay dividends for at least 3 years due to holding rules.  

What happens if the company fails?

You may be eligible for loss relief, which allows you to offset your net loss against income or capital gains.

Can non-UK residents invest in EIS?

Only UK taxpayers can benefit from EIS tax reliefs. Non-residents generally aren’t eligible.