Using EIS for Inheritance Tax Planning: A Practical Guide

Understanding Inheritance Tax in the UK

UK inheritance tax is charged at a rate of 40% on the value of an estate exceeding a certain threshold, or as it’s officially called, the nil-rate band (NRB). The nil-rate band is £325,000 and is currently set to remain at that level until at least April 2030. Put simply, if someone’s estate is worth under that figure, there is no IHT liability, but the 40% inheritance tax will apply to someone’s estate’s value over that amount.

Key Features of the Nil-Rate Band

• Current Nil-Band Threshold: The threshold is currently £325,000 per person.
• Tax Rate: The nil-rate band is £325,000 and is currently set to remain at that level until at least April 2030.
• Transferability: Any unused nil-rate band can generally be transferred to a surviving spouse or civil partner, subject to the relevant conditions and claim requirements. Effectively, a person can double their IHT threshold to £650,000.
• Lifetime Gifts: Gifts made during a person’s lifetime, specifically potentially exempt transfers that become chargeable if the donor dies within seven years, can reduce the available nil-rate band.

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.

The Residence Nil-Rate Band (RNRB)

On top of the regular NRB, there is an additional allowance that can also increase how much of your assets you can pass to beneficiaries with 0% tax applied. Essentially, this band was designed to allow families to pass on their homes without tax, although only children or grandchildren can be the recipients.

• Current RNRB Amount: At the time of writing this article, the RNRB is set at £175,000 per person.
• Combined RNRB Allowance: When you factor in the regular NRB on top of the RNRB, that means each person in the UK could effectively pass on up to £500,000 tax-free. It’s even possible for married couples or civil partners to combine their overall allowances, although certain conditions must be met.
• RNRB Conditions: As mentioned, only direct descendants can benefit from the RNRB. Furthermore, the residence nil-rate band tapers away for estates above £2 million.

Why the Enterprise Investment Scheme Matters for Estate Planning

Inheritance tax allowances are set out in current UK legislation. Where estates exceed available allowances, some individuals may consider a range of estate planning approaches, depending on their circumstances.

The Enterprise Investment Scheme (EIS) offers a different way that may be considered as part of a wider estate planning discussion. While EIS is primarily associated with income tax and capital gains tax features, qualifying EIS investments may also be eligible for Business Relief under current rules, subject to meeting the relevant conditions.

Tax treatment depends on individual circumstances and may change. Reliefs are not guaranteed, and EIS investments carry a higher level of risk and may not be suitable for all investors.

What is the Enterprise Investment Scheme?

The Enterprise Investment Scheme (EIS) is a UK government scheme intended to support investment into smaller, early-stage companies. Subject to meeting qualifying conditions, eligible investors may be able to access certain tax reliefs, which can include income tax relief, capital gains tax treatment, loss relief, and potential inheritance tax considerations.

Under current rules, qualifying EIS investments may be eligible for Business Relief once the relevant conditions and holding periods are met. This can affect how those investments are treated for inheritance tax purposes. From April 2026, proposed changes are expected to limit the value of assets eligible for full Business Relief, with amounts above the applicable threshold subject to inheritance tax at a reduced rate. The availability and extent of any relief will depend on the rules in force at the time and individual circumstances.

EIS investments are higher risk and tax treatment may change. Reliefs are not guaranteed and professional advice is generally recommended before making any investment or estate planning decisions.

How Business Relief Applies to EIS Shares

Formerly known as Business Property Relief, business relief is a long-standing provision in UK tax law that allows certain business assets to be passed to beneficiaries without paying inheritance tax.

If you invest in an EIS qualifying company, the shares you receive can qualify for 100% Business Relief, so long as:

• You have held the EIS shares for at least two years
• The company continues to qualify for both the EIS scheme and Business Relief
• You still hold the shares at the time of death.

If those conditions are met, you qualify for the IHT relief, and your investment can be passed to your beneficiaries without inheritance tax applied. This is changing from April 2026. It is being capped at £2.5m. Above that level, relief is expected to apply at 50%, which at a 40% IHT rate produces an effective 20% IHT charge on the excess.

EIS Tax Relief Benefits for Investors

The reason that inheritance tax relief is often forgotten about when it comes to the EIS is that the scheme is more known for its other tax benefits.

Some of the other tax reliefs available for eligible investors are:

Income Tax Relief

One of the tax reliefs associated with the Enterprise Investment Scheme is income tax relief of up to 30%, available where qualifying conditions are met. This relief can be claimed once EIS3 has been received but there are minimum holding periods. Subject to HMRC rules, the relief can be set against either the current or previous tax year, within the applicable annual investment limits. Higher investment limits may apply where investments are made in qualifying Knowledge Intensive Companies.

Capital Gains Tax Relief

Eligible investors investing in an EIS scheme can potentially receive tax-free gains should their investment go as planned. Once you have held shares for a minimum of three years, when you decide to sell them off, any gains are exempt from capital gains tax.

This relief only applies where there is a gain and all relevant conditions are satisfied. If you make a loss when selling the shares, there are no taxable gains anyway.

Capital Gains Deferral Relief

Furthermore, you can also defer capital gains tax on the sale of other qualifying assets if those gains are used to invest in an EIS company. As long as those gains were made within three years before your investment and up to one year after, the deferred gain generally only becomes chargeable on disposal of the EIS shares or if the shares cease to qualify.

EIS Inheritance Tax Relief

Finally, we have the inheritance tax relief that this guide is all about. EIS investments will qualify for business relief that will save you the 40% IHT that’s normally chargeable upon your death. The only qualifying condition here is that you must have held the shares for a minimum of two years before your death. Above that level, relief is expected to apply at 50%, which at a 40% IHT rate produces an effective 20% IHT charge on the excess.

Loss Relief

There’s also relief on any losses that might come your way should the investment fail. While it will not cover your losses completely, it’s possible to claim up to 45% (minus any claimed income tax relief) of them through loss relief. You can claim those losses against your capital gains or income tax bill and the rate of loss relief depends on your income tax rate.

The Role of Risk in EIS-Based IHT Planning

As investments are placed into early-stage, unlisted businesses that have high potential, any EIS investment is inherently risky. There’s no escaping the fact that many will fail within the first few years.

From an inheritance tax planning perspective, this should not be ignored. While the tax purposes are attractive, including the tax-free inheritance you could potentially pass along, they should never be the sole reason you’re investing. If they are, you’re essentially gambling the money you have worked hard to pass along at the time of your death.

Key risks to consider include:

• Company failure resulting in capital loss
• Loss of Business Relief if the company ceases to qualify
• Illiquidity, as EIS shares are not easily sold
• Legislative risk, as tax rules can change

Always seek advice before investing, especially if it is to make use of potential IHT relief. While the scheme can work as part of a wider inheritance planning strategy, relying on it carries extreme risks.

Who Should Consider Using EIS Investing for IHT Planning?

The EIS is not for everyone, especially due to the high risk involved. Making the wrong investment could result in losing all the money you were hoping to pass along to your beneficiaries.

Typically, using an EIS qualifying investment for inheritance tax planning can be considered by speaking to a qualified professional. This may be more relevant to individuals who:

• High-net-worth individuals with higher than average inheritance tax exposure
• Investors who have sufficient income tax liabilities
• Investors who are comfortable and financially able to make higher-risk investments
• People who want more flexibility through their IHT planning

If you’re the type of person who prioritises capital preservation over anything else, the EIS scheme is probably not for you.

Using EIS Later in Life

One of the main reasons that individuals choose the EIS for IHT planning is that it can be implemented fairly late, at least in comparison to other strategies. As shares qualify for Business Relief within just two years, many senior individuals consider using the scheme, especially if they have used up all the other planning strategies.

However, you should never consider the EIS as a last-minute solution or a last resort. The underlying investments carry real commercial risk, and careful selection of qualifying companies is essential.

Professional Advice on EIS Investments Is Essential

If you are considering using EIS for inheritance tax planning purposes, you should understand that it is complex and risky. You should never just jump into any investment scheme, without expert advice. We recommend speaking to financial advisors, tax specialists and estate planners to get the advice you need.

They will help ensure:

• Your investments qualify for EIS and Business Relief
• Your strategy works well alongside your wider estate planning goals
• Your risk is well-managed and diversified
• You meet all the compliance requirements
• You have the financial resilience to make these types of investments

The Key Takeaway

EIS can be a flexible tool for inheritance tax planning when used correctly. By combining Business Relief with income tax incentives and growth potential, it offers an alternative to more traditional IHT strategies that often require giving up control of assets for extended periods.

However, the benefits come with meaningful risk. EIS investments should form part of a broader, diversified estate plan rather than a standalone solution. For investors who understand the risks and seek a tax-efficient way to pass on wealth while supporting UK businesses, EIS can play a role in long-term inheritance tax planning.

EIS Inheritance Tax FAQs

Can EIS be used to reduce inheritance tax?

Yes. Any EIS shares you own qualify for 100% Business Relief. Therefore, they can be passed on free of IHT if certain conditions are met. This is changing from April 2026. It is being capped at £2.5m. After that, there is a 50% IHT rate, so a tax of 20%.

How long must EIS shares be held to qualify for IHT relief?

To qualify for IHT relief, EIS shares must be held for at least two years and still owned at the time of death. 

What inheritance tax rate does EIS help mitigate?

Qualifying EIS shares can mitigate the standard 40% inheritance tax charge on those assets.

Are EIS investments suitable for IHT planning for everyone?

No. EIS investments are high-risk and may not be suitable for all investors. Suitability depends on individual circumstances, risk tolerance and investment objectives.

What happens if the EIS company stops qualifying?

If a company stops meeting the EIS qualifying criteria, investors may lose IHT relief.

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 investments are high risk, illiquid, and you may lose some or all of your invested capital. These investments are not suitable for all investors. You should seek independent financial and tax advice before investing.