What is the Enterprise Investment Scheme
If you’re looking for an initial guide to the Enterprise Investment Scheme, our experts at IW Capital offer a comprehensive introduction to its rules and qualifying criteria – plus some of the benefits of this investment initiative.
So starting with the absolute basics, what exactly is The Enterprise Investment Scheme?
EIS was developed by the government in order to incentivise investment in high-risk companies. Part of a long-term initiative running since 1994, EIS Investments encourage investors to buy shares in new or young businesses, helping those with high-growth potential to reach those heights of success faster.
While certainly not without its risks, the Enterprise Investment Scheme can help you to diversify your portfolio and make a contribution to the UK economy by boosting businesses and employment.
Benefits of the Enterprise Investment Scheme
EIS offers many benefits – such as income tax relief of 30% on your investment.
Another benefit is that investors don’t have to pay any capital gains tax on any profits made after the sale of those shares, and any previous capital gains can be deferred. Additionally, investors are also able to offset any losses they may encounter against their earnings – protecting them if the business fails.
Of course as with any type of investment, your individual circumstances and various other factors will have a bearing on the finer details. Here’s a deeper look at the benefits of EIS along with some interesting facts and figures.
Enterprise Investment Scheme Rules and Requirements
While these benefits have successfully encouraged investors to buy into the Enterprise Investment Scheme, it’s important to be aware that once invested, there are rules that must be followed in order to take advantage of them.
The rules include stipulations that the company must be established in the UK but not trading on any recognised stock exchange. The company must also not have gross assets worth more than £15million before the share issue, or more than £16 million immediately afterwards – and must have fewer than 250 full-time equivalent employees.
An EIS qualification also requires that investors must invest for a minimum of three years, and cannot hold more than a 30% share in the company. Alongside this, investors must also be investing in a qualified EIS investment company. This means that if the company does not adhere to EIS investment rules then they are no longer qualified, and in turn the investors are no longer entitled to benefit from the investment.
In the Autumn Budget of November 2017 Philip Hammond, Chancellor of the Exchequer, introduced an additional set of regulations governing how investors can use the Enterprise Investment Scheme to invest into SMEs. One of the main aims of the change was to begin eliminating the use of EIS, as well as other tax-efficient vehicles, for tax-motivated investments. A tax-motivated investment is an investment where the returns are mainly generated through the tax-relief, with little risk attached to the original capital.
Because the qualifying criteria for businesses eligible for funding from the Enterprise Investment Scheme changes depending on where the government feel it’s most required, it’s always important to get professional advice on the latest EIS rules.
As things currently stand, some of the operational activities that exclude a business from access include:
- Property development, leasing and land sales
- Banking, lending, insurance, legal and accounting services
- Forestry and farming
- Coal, steel and energy
Always check with the government website or an EIS expert if you’re unsure of the most up-to-date exclusions.
Knowledge Intensive Companies
With the Enterprise Investment Scheme comes the opportunity to back what are known as ‘Knowledge Intensive Companies’, or KICs. These are businesses whose activities are primarily centred on research and development.
As of the autumn budget in 2017, EIS rules surrounding Knowledge Intensive Companies, or KICs, have changed, and these types of businesses are now able to access a higher level of funding than others under the scheme.
The specific Enterprise investment Scheme rules for KICs are numerous, and the investment offer cannot be structured in such a way as to mitigate as much risk as possible – so these EIS options may need a little more thought if you’re less inclined towards taking risks.
Some of the EIS rules that apply specifically to Knowledge Intensive Companies include:
- Investments are made on new shares only
- Capital raised must be for growth, not to pay for current everyday expenses
- The company can have up to 500 employees
- The company must be independent of any group
- The company must be less than 10 years old
- Funds must be used within two years of investment
- Funding limits for KICs are £10m per year, or £20m in total
All ‘knowledge intensive’ companies must meet these stipulations, plus there are also ‘innovation’ or ‘skilled employee’ conditions to meet too. The ‘innovation’ condition states that the company must, at the time the shares are issued, be either creating or preparing to create intellectual property that will go on to form the majority of their business. If this is not applicable, a company may instead meet the ‘skilled employee’ condition. This states that at least 20% of the company’s employees must have a higher education and be involved directly in research and development. Once these, and the original EIS conditions, are met then a company will qualify for an additional £1million investment on top of the original £1 million Enterprise Investment Scheme investment. This means that an investor would be eligible for £600,000 tax relief on an investment of £2 million.
Despite the stipulations attached to them, they are a life-line for young and high-risk companies that may otherwise have gone without investment. This is particularly true for companies operating in the following areas, which according to HMRC figures received over £500 million in EIS funding in 2015-2016:
- Information and Communication
Energy tech was also a large beneficiary of Enterprise Investment Scheme with 115 companies across the electricity, gas, steam and air conditioning sectors receiving £282 million in the same period.
There are two ways of approaching the Enterprise Investment Scheme if you’re considering adding this type of asset to your portfolio. You can fly solo with a direct investment in a single company, or you can pool resources with other investors, and work through a specialist fund manager.
With the latter option, you’ll also be able to choose between investing in an approved or unapproved EIS fund, which have slightly differing criteria to qualify and will impact the timings of your tax relief claims. These details will all need to be discussed with your investment advisor or fund manager – but as always, do make sure you’re getting honest advice from a trusted specialist.
Loss Relief on Tax Bills
Because the Enterprise Investment Scheme is centred on young companies with high aims but larger investment risks, this is cushioned somewhat by the ability to claim loss relief should things not go to plan.
You have the option to claim any eligible loss relief against either your capital gains or income tax bill – and the choice is yours (advisably under the guidance of your financial or investment advisor). If shares are sold at a loss or drop to zero value, this will help you to mitigate some of your overall loses.
Your investment reliefs are all influenced by your personal circumstances – especially your marital status and any shares you gift to your spouse. As we always come back to, it’s essential to get bespoke advice before investing, period.
Enterprise Investment Scheme Advice
If you like the idea of diversifying your portfolio, and you don’t mind the different potential risk/reward outcomes of an EIS, why not request your free Enterprise Investment Scheme Brochure here.
Alternatively, if you’d like to access professional bespoke advice on the Enterprise Investment Scheme, contact one of our experts here.