The Enterprise Investment Scheme (EIS) Explained

Written by Karen Bryan

The Enterprise Investment Scheme (EIS), one of the four venture capital schemes, was established by the UK government in 1994, to encourage investors to help early-stage businesses and start-ups to secure the finances they need in order to grow.

This scheme is extremely beneficial for both parties involved. For investors, the EIS offers substantial tax relief benefits, which they would not have secured unless investing in a small, early-stage business under the scheme. For SMEs, the EIS allows them to gain the necessary funds to kick-start their business.

If you are an investor and would like to discover more about the EIS tax relief benefits, or a business owner who would like to find out whether their business is eligible for EIS investments, read on.

EIS rules for investors

Before you can receive EIS tax benefits as an investor, you must follow the rules outlined below:

• You are not allowed to have a connection or a relationship with the EIS company

• You must be a UK taxpayer who has invested in shares for at least three years

• You must purchase new shares that do not exist on the market

• Carrying forward your EIS tax relief to future tax years are not permitted

• The maximum amount you can invest in qualifying companies is £1 million per tax year. If the EIS-eligible business is in the “knowledge-intensive” category, this increases to £2 million per tax year

• Selling or gifting the shares within three years can result in relief clawback

EIS tax benefits

Besides the excitement of watching a new company flourish and, hopefully, achieve great things, the most attractive aspect of the EIS scheme is that investors will receive generous tax benefits. The four most significant tax benefits are as follows:

Income tax relief
Individual investors under EIS can benefit from a 30% income tax relief. So theoretically, for £10,000 invested in an eligible small business, £3,000 of it will be removed from the income tax that investment year.

Capital gains exemption

Provided you have held the shares for three years or more, you are able to receive a capital gains exemption on any profits made on them. This means that if you initially invested £10,000 and then sold the share five years later at double the amount, you can still receive the full £10,000 profit from the sale.

Loss relief
You can claim EIS loss relief if the business is not performing well and you are at a loss. The loss relief is on the at-risk capital and will be multiplied by the individual investor’s tax rate.

Inheritance tax relief
As long as you have held shares in the EIS business for at least two years, and they were purchased through EIS, then you will not have to pay inheritance tax on them. However, if the shares are recognised on the stock exchange, EIS inheritance tax relief is unavailable.

EIS rules for businesses

In order to be eligible for EIS, and for investors to claim and keep their EIS tax relief benefits, a set of regulations exist which govern the type of business that can apply for EIS investment.

Your company may be eligible for EIS if it meets these requirements:

• The company must have a permanent establishment in the UK

• The company must have less than 250 full-time employees at the time of issuing shares

• It should not have, or does not have, plans to trade on a recognised stock exchange, like the London Stock Exchange

• Expecting to close after completing the project is not allowed

• Apart from qualifying subsidiaries, you must not have control over another company, or should not be controlled by another company.

• You must not have £15 million worth of gross assets before the shares are issued, and no more than £16 million straight after.

• Your company cannot acquire more than £5 million per annum and up to £12 million in your company’s entire existence – which includes capital received from subsidiaries.

• Your company must be in a qualifying trade. Most trades will qualify, though there are exceptions, such as legal or financial services, nursing homes, hotels and banking.

The above list is not exhaustive, so it is wise to check the official Government website for thorough guidelines on EIS eligibility.

Moreover, individual investors who wish to establish whether their investment will qualify for the tax benefits under EIS can request an “advance assurance” from HMRC, via the company they wish to invest in. This gives both parties peace of mind before an investment goes ahead.

Since its inception, the EIS scheme has helped over 26,000 UK companies receive investments, allowing many SMEs to raise their finances and go on to achieve great things. Likewise, many investors have been able to expand their portfolios and invest in exciting new ventures, whilst receiving liberal tax breaks for doing so.