What is an Enterprise Investment Scheme?

What is the Enterprise Investment Scheme (EIS)?

Launched in 1994, it is a UK government-backed initiative designed to encourage investment in small, high-risk companies by offering generous tax reliefs to investors. Along with the similar Seed Enterprise Investment Scheme, it has become one of the most attractive routes for individual investors seeking both financial returns and tax efficiency.

The goal is to promote entrepreneurship and stimulate economic growth by helping fledgling businesses raise capital. The tax relief program allows investors to claim income tax relief, capital gains tax deferral, loss relief, and inheritance tax exemption. Those benefits make it particularly attractive to higher-rate taxpayers.

The Main Objectives of the EIS Scheme

The UK government created the EIS to:

• Support innovation and entrepreneurship
• Help early-stage businesses access capital
• Drive job creation and economic development in the UK

By reducing the financial risk associated with investing in smaller companies, the EIS incentivises private funding that might otherwise be difficult for start-ups to secure.

The Key Features of the Enterprise Investment Scheme

Here are some of the core features of the Enterprise Investment Scheme:

• Available only to UK taxpayers
• Investment must be in unlisted companies or companies listed on AIM (Alternative Investment Market)
• Shares must be ordinary shares with no special rights or preferential treatment
• The investment must be held for a minimum of three years to qualify for full tax relief
• Annual investment limit for individuals: £1 million, or up to £2 million if at least £1 million is invested in knowledge-intensive companies.

Please note: This is not an exhaustive list of EIS features. Rules and thresholds may change at any time and without notice. Always consult with a financial adviser for the most current information.

Who Can Invest in EIS?

The EIS is designed for individual UK taxpayers and not corporations or trusts. To qualify for the full range of tax reliefs, the investor:

• Must not be connected to the company (i.e., not an employee or hold more than 30% of shares)
• Must not have any preferential rights or arrangements with the company
• Must invest money, not assets (i.e., cash investment for new shares)

Investors can include high-net-worth individuals, angel investors, and even retail investors willing to take on higher risk in exchange for tax relief.

Types of Businesses Eligible for EIS Investment

Not all companies can raise funds through EIS. An EIS qualifying company must:

• Be UK-based and carry out most of its business activities in the UK
• Must raise funds within 7 years of first commercial sale (or 10 years for KICs)
• Not be listed on a major stock exchange (but AIM is acceptable) and should have no plans to become publicly traded within the relevant period. 
• Have gross assets of no more than £15 million before the investment, and £16 million immediately after share issue.
• Have fewer than 250 full-time employees (or 500 full-time equivalents for knowledge-intensive companies)
• Not be controlled by another company (though subsidiaries are allowed if performing a qualifying trade and less than 50% owned)
• Use the funds for growth and development, not to acquire another business
• KICs must show that 20% of their workforce has been in relevant advanced roles for a minimum of 3 years. 

Additionally, certain types of businesses are excluded, such as those involved in property development, finance, and legal services.

Just note that the qualifying requirements are subject to change at any time, so make sure you’re up to date if you’re a company hoping to seek EIS investment. 

Tax Reliefs Offered Under EIS

One of the most compelling reasons to consider an EIS investment is the wide range of EIS relief options available. These tax incentives are designed to reduce the financial risk investors take when backing early-stage, high-growth companies.

If the company qualifies and the shares are held for the required holding period, the tax treatment can be highly advantageous. Below is a breakdown of the main types of reliefs and how they work in practice.

Investors can:

Claim EIS Income Tax Relief

Investors can claim up to 30% income tax relief on investments of up to £1 million per year (or £2 million if investing in knowledge-intensive companies).

To benefit from the relief, you must have a sufficient income tax liability in the current or previous tax year in which you invest. This is known as the carry-back facility. It allows flexibility in timing your claim for EIS relief.

Example:

If you invest £100,000 into an eligible EIS company and have a personal income tax liability of at least £30,000, you can reduce that liability by the full £30,000. If your liability is only £20,000, you could carry forward or back the remainder.

This relief applies per twelve-month period, and there is no minimum investment required. That said, most funds and providers have their own minimum thresholds (often £10,000 or £20,000).

Claim Capital Gains Tax (CGT) Deferral Relief

One of the most overlooked yet valuable aspects of EIS is CGT deferral relief. If you’ve recently sold an asset and made a capital gain, you can defer the capital gains tax by reinvesting the gain into an EIS-eligible company.

The gain does not disappear. It is deferred until the EIS shares are sold or disposed of.

Example:

Let’s say you sell shares and realise a gain of £50,000. You can hold off or defer the capital gains tax by reinvesting that gain into EIS-qualifying companies. You can defer the CGT for as long as you hold the EIS shares. If you keep them for 5 years, the CGT is postponed until disposal. By that time, you may be in a lower tax band or qualify for additional reliefs.

This capital gains deferral applies to gains made up to three years before and one year after the EIS investment.

CGT Exemption on EIS Shares

If you hold your EIS shares for at least three years and claim EIS relief successfully, any gain made when you eventually sell those shares is completely exempt from capital gains tax.

This means investors can benefit from tax-free growth, provided the original income tax relief wasn’t withdrawn and the company maintained its qualifying status throughout.

Example:

Suppose you invest £50,000 in a company that triples in value over four years. When you sell your shares for £150,000, the £100,000 gain is 100% tax-free.

This exemption is one of the strongest arguments for using EIS as a long-term wealth-building strategy. That’s especially the case for those targeting high-growth startups and companies that qualify in innovative sectors.

Claim Loss Relief

Because EIS investments are inherently high-risk, the government offers a safety net in the form of loss relief. If the business fails, you can offset the net loss (after income tax relief) against your income tax or capital gains.

This reduces the downside risk and can be especially beneficial for higher-rate taxpayers.

Example:

Let’s say you invest £100,000 and receive £30,000 back in EIS income tax relief. If the company goes bust and you recover nothing, your net loss is £70,000. If you’re in the 45% tax band, you can offset the loss to reclaim £31,500. That makes your total effective loss only £38,500 on a £100,000 investment. That’s a worst-case scenario, and still better than a complete capital loss.

Inheritance Tax Relief

After holding the EIS shares for two years, an investor may qualify for 100% Business Relief. This makes them exempt from Inheritance Tax, provided those shares are still held at the time of death.

This makes EIS especially attractive for estate planning, offering a route to pass on assets tax-free to beneficiaries while also supporting UK businesses.

Additional Notes on Claiming EIS Tax Reliefs

To access any of the above reliefs, the company must have received advance assurance from HMRC or submit a valid compliance statement (EIS1). You’ll then receive an EIS3 form to enable your claim for EIS relief.

It’s also important to note:

• Shares must be new ordinary shares with limited preferential rights.
• The company must not be listed on the main market of the London Stock Exchange (AIM is acceptable).
• The investment must be used within two years for a qualifying trade, and not just to raise money for acquisitions or asset purchases.
• Reliefs may be withdrawn if you sell shares early or the company ceases to qualify.

As always, the exact tax treatment depends on your individual circumstances and is subject to change without notice. Which is why professional advice is strongly recommended.

Advantages of EIS for Investors

Here are the main benefits:

• Tax efficiency: Reduce your income tax bill, defer or avoid CGT, and enjoy IHT exemptions
• Downside protection: Loss relief softens the risk of investing in early-stage ventures
• High potential returns: Although risky, successful companies can deliver significant capital gains
• Support for innovation: EIS investments help support UK innovation and SMEs

Risks and Limitations

Despite the benefits, EIS investments are high risk and may not be suitable for everyone.

Here are some key drawbacks:

• Business failure risk: Early-stage companies have a high risk of failure.
• Liquidity risk: EIS shares are unlisted, meaning they’re difficult to sell quickly
• Complex tax rules: Missteps can lead to losing some or all tax reliefs
• Long investment horizon: You must hold shares for at least three years to claim reliefs
• Limited company types: Only specific industries and company sizes qualify

It’s also worth noting that the past performance of EIS funds or companies is no guarantee of future returns.

EIS vs SEIS vs VCT

The UK offers several other venture capital schemes:

The SEIS (Seed Enterprise Investment Scheme) is for even earlier-stage companies than the EIS and offers higher tax relief, but with stricter eligibility criteria.

As for VCTs (Venture Capital Trusts), these are listed investment trusts that also invest in small companies but offer slightly less generous reliefs and pay tax-free dividends.

Recent Changes and Trends

The EIS scheme has evolved over the years. Recent changes and trends include:

• Focus on knowledge-intensive companies: Investors can now commit up to £2 million per tax year into these high-growth sectors
• Digital platforms and funds: EIS investment is more accessible than ever through online portals
• Tax clampdowns and increased HMRC scrutiny: Companies must pre-qualify, and investors need EIS3 certificates to claim relief

There’s ongoing political support for EIS as a vital tool to fund innovation, particularly in tech, AI, biotech, and clean energy.

The Takeaway – Is EIS Right for You?

The Enterprise Investment Scheme is one of the most powerful investment incentives in the UK. It offers a compelling mix of tax reliefs, potentially high returns, and a chance to back innovative UK businesses. However, it’s not without risk.

If you’re a UK taxpayer with a long-term outlook, EIS can be a great way to diversify your portfolio or lower your tax bill. You will also play your part in supporting economic growth. That said, due diligence and professional advice are crucial, especially when investing directly in startups or small companies.

As always, consider speaking to an independent financial adviser before making any investment decisions.

Frequently Asked Questions

Who qualifies to invest in an Enterprise Investment Scheme?

Only individual UK taxpayers are eligible to claim EIS tax reliefs. Investors must not be connected to the company and must invest cash in new ordinary shares. Qualification is also dependent on individual circumstances.

What happens if the company I invest in through EIS fails?

If the company fails and you’ve lost money, you can claim loss relief against your income tax or capital gains tax. This reduces the downside risk of the investment and is one of the key safety nets of EIS.

How long must I hold EIS shares to keep the tax benefits?

You must hold EIS shares for at least three years to retain full income tax and capital gains tax reliefs. Selling before that period could result in the reliefs being withdrawn.

Can I invest in EIS through a fund?

Yes. You can invest in an EIS-qualifying company through EIS funds managed by professionals. These funds offer diversification and expert selection but may include management fees.

Are EIS investments risky?

Yes. EIS investments are considered high risk, as they involve smaller businesses that may fail. However, the tax reliefs help to offset this risk. That makes it a more attractive investment for experienced or high-net-worth investors.