UK Enterprise Investment Scheme (EIS) – A Worthy Tax-Efficient Investment for High Net-Worth Individuals?

Understanding the Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme is a UK government program aimed at encouraging investment in early-stage companies that might otherwise struggle to attract funding. It does so by offering EIS tax reliefs to qualifying investors who purchase EIS shares in a qualifying company.

Investments can be made directly into a business or through professionally managed EIS funds. The latter pools capital across multiple companies to help mitigate risk.

Who Can Benefit from an EIS Investment?

EIS is designed for UK taxpayers who have a sufficient income tax liability to benefit from the EIS reliefs available. While the scheme is available to a wide range of investors, it’s particularly popular among:

• High earners seeking to reduce their income tax bill
• Individuals with recent capital gains looking to defer or eliminate their CGT liability
• Estate planners seeking inheritance tax relief
• Investors who want exposure to high-growth private companies
• Business angels or SEIS investors looking to expand their portfolios

Key EIS Tax Reliefs Explained

The EIS scheme offers a bundled suite of tax reliefs that work together to enhance investor returns and reduce downside risk.

Here’s a breakdown of those EIS tax reliefs:

Income Tax Relief (30%)

Investors can claim EIS income tax relief equal to 30% of their initial investment, with additional flexibility built in:

• Maximum annual investment: £1 million per tax year
• Can be increased to £2 million if at least £1 million goes into Knowledge Intensive Companies (KICs)
• Relief applies to the current tax year, or can be carried back to the previous tax year
• You must have a sufficient income tax liability to benefit in full

Example: Invest £200,000 in an EIS qualifying company and offset £60,000 from your income tax bill, assuming you have that much liability. If you don’t, the excess can be used against last year’s liability (carry-back).

Capital Gains Tax Deferral

Another benefit that is extremely attractive to high-worth individuals is the CGT deferral relief promised by the EIS scheme. If you’ve made gains on the sale of assets, you can defer the capital gains tax owed on them by investing them into smaller companies via the Enterprise Investment Scheme. Money raised could have come from the sale of a property or business, or when disposing of shares.

• Applies to gains made up to 3 years prior or 1 year after your EIS investment
• CGT is deferred until the EIS shares are sold or transferred
• The deferral is unlimited, meaning there’s no cap on how much gain can be deferred

Example: You generate a £100,000 gain from selling a property and reinvest it into EIS-eligible shares. You do not have to pay CGT until you dispose of your EIS shares.

Tax-Free Growth

Understandably, this is one of the most appealing aspects of EIS tax reliefs. Any profit individual investors make on EIS shares is exempt from capital gains tax. That’s as long as you meet the following requirements.

• Shares must be held for at least three years
• The EIS company must maintain its qualifying status throughout
• You must have claimed EIS income tax relief on the original investment

Benefits:

• No CGT on gains from a successful exit
• Long-term capital appreciation becomes fully tax-free
• Can significantly improve net returns over time

Loss Relief

If your EIS investment doesn’t go to plan and the company fails, the UK government offers loss relief to help soften the blow.

You can offset your loss against either: – Your income tax (in the current or previous year), or – A future capital gain

Here’s how it works:

• The relievable loss is your investment minus any income tax relief already claimed
• You can set this loss against your general income (up to a maximum of £50,000 or 25% of your income, whichever is greater), or against capital gains
• The net effect is a smaller actual loss than you might expect

Example: You invest £100,000 and claim £30,000 in income tax relief. If the company fails, your effective loss is £70,000. As a 45% taxpayer, you can offset that loss against income, recovering £31,500. That brings your real loss down to £38,500

Benefits:

• Significant downside protection for high earners
• Helps rebalance portfolio performance if one EIS company underperforms
• Can be used strategically across tax years

Inheritance Tax Relief

Another compelling benefit of EIS is that it can help with estate planning through Business Relief (formerly Business Property Relief).

Here’s what to know:

• EIS shares can qualify for 100% inheritance tax relief
• You must hold the shares for at least two years before death
• Shares must still be held at the time of death
• The EIS company must still meet the qualifying business activity criteria

What this means:

• EIS shares are excluded from your estate for inheritance tax purposes
• Can significantly reduce the IHT burden on beneficiaries

Example: An investor holds £500,000 in EIS shares for more than two years and passes away. These shares may be 100% exempt from IHT. That’s a potential saving for the estate of £200,000 (assuming a 40% tax rate).

Important: The availability of tax reliefs depends on your individual circumstances and is subject to change by HMRC, sometimes without warning. It’s essential to seek professional advice tailored to your situation.

Which Companies Qualify for EIS?

To qualify for EIS investment, a company must meet strict HMRC criteria designed to ensure that only genuinely early-stage, high-growth businesses receive support.

While the rules may seem complex, many EIS companies qualify without issue. That’s especially the case for those in the tech, clean energy, and innovation sectors.

To be considered an EIS qualifying company, the business must:

• Be less than 7 years old (or 10 years for Knowledge Intensive Companies, or KICs) from the date of first commercial sale
• Have fewer than 250 full-time employees (or 500 for KICs)
• Have gross assets of no more than £15 million before the investment, and not more than £16 million after
• Be unquoted and not listed on the main market of the London Stock Exchange (AIM is acceptable)
• Have a permanent UK establishment
• Not be controlled by another company
• Not control a non-qualifying subsidiary
• Not exceed the cumulative funds raised of £12 million through EIS or VCT (or £20 million for KICs)

Qualifying Trade Rules

To be eligible for EIS tax reliefs, the company must carry out a qualifying trade. This includes most commercial sectors, but excludes specific industries considered lower risk or inappropriate for public tax incentives.

A company will not qualify if more than 20% of its activities involve the following excluded trades:

• Coal or steel production
• Farming or market gardening
• Property development
• Legal or financial services
• Banking or insurance
• Debt or financing
• Running hotels or nursing homes
• Generation or export of electricity or other fuel
• Dealing in land or commodities

Subsidiaries must also carry out qualifying business activity. If a non-qualifying trade exceeds 20% of operations (by turnover, assets, or management time), the business may be ineligible.

Again, the qualifying rules for companies are subject to change at any time and without any warning.  

What Is a Knowledge Intensive Company (KIC)?

Some businesses qualify for enhanced EIS benefits by meeting the definition of a Knowledge Intensive Company (KIC). Companies with this status can raise more from the scheme, while investors also receive increased tax privileges.

What Makes a Company “Knowledge Intensive”?

A company can be classed as a KIC if it meets additional criteria around innovation, R&D, and staff qualifications.

To qualify as a KIC, a company must:

Meet one of the following innovation conditions:

• At least 15% of operating costs have been spent on R&D in any one of the previous three years, or
• At least 10% of operating costs have been spent on R&D each year for the past three years

AND one of the following conditions:

• The company creates or intends to create intellectual property, which it expects will be its main source of business revenue within 10 years
• At least 20% of employees hold a higher education qualification and are engaged in R&D or innovation-focused work

These rules are designed to ensure that KIC status is reserved for businesses truly driving forward new technology or innovation.

Why It Matters for Investors

If a company qualifies as a KIC, investors gain access to enhanced EIS investment benefits:

• You can invest up to £2 million per tax year and still claim income tax relief at 30% (The usual limit is £1 million for non-KIC companies)
• The company can raise up to £20 million in total under venture capital schemes, including EIS (Compared to £12 million for standard companies)
• The company can be up to 10 years old from its first commercial sale and still qualify for EIS (Instead of the usual 7 years)

Tip for Investors

Always check whether a business has received advance assurance from HMRC confirming its KIC status. This gives you greater confidence that your investment will qualify for EIS tax reliefs, especially if you’re putting in larger sums.

A Case Study of a Diversified EIS Investor

Let’s take a look at how and why an investor might consider the Enterprise Investment Scheme.

Investor Profile: Sarah, a 48-year-old entrepreneur, has just sold her business for £1.2 million. She plans to reinvest £250,000 into UK startups while reducing her upcoming tax exposure.

Strategy:

She invests £150,000 across three separate EIS funds. Each is spread across different industries to ensure diversity in her investment. As a result, she can:

• Claim £45,000 in income tax relief
• Defer £100,000 in CGT from her business sale

She then:

• Plans to hold her investments for 5+ years to benefit from tax-free growth
• Builds a separate succession strategy by holding shares for IHT relief

Final Outcome: Sarah has mitigated risk through diversification and significantly reduced her tax bill. On top of that, her investments have made a real contribution to UK innovation.

EIS Exit Strategies

If you’re a savvy investor, you’re probably already considering your options when it comes to exit strategies. As there is no formal EIS ‘maturity’ date, the exit usually depends on company performance.

Common routes include:

• Trade sales or acquisition by larger firms
• Public listing on AIM or other exchanges
• Share buybacks (though tax relief may be affected)
• Liquidation (if the company fails)

EIS funds usually plan exits between years 4–7, depending on the sector and business cycle. Always review financial forecasts and management’s stated goals when investing.

Risks and Considerations

While we’ve highlighted the tax benefits of the Enterprise Investment Scheme, it’s also important to make clear the different risks associated with investing.

• High risk: Early-stage ventures can be volatile and may fail
• Liquidity: EIS shares are unlisted and not easily tradable
• Complex tax treatment: Reliefs may be lost if conditions aren’t met
• Time horizon: Must hold shares for 3+ years for full reliefs

There’s no doubt the risks are great. However, experienced investors with previous investment experience in private markets may believe the potential upside and tax benefits can make the risks worthwhile.

Is EIS Right for You?

For those seeking to back early-stage businesses while contributing to UK innovation and building a tax-advantaged portfolio, EIS is hard to ignore. Its ability to turn high-risk investments into high-reward opportunities makes it one of the most powerful tools in UK tax planning and wealth management.

Whether you’re an angel investor, entrepreneur, or seasoned HNW individual, EIS deserves a serious look. Just be sure to assess every opportunity in light of your individual circumstances, risk appetite, and financial goals.