Gain tax relief by investing in qualified companies

Enterprise Investment Scheme (EIS)

What is an Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme (EIS) was introduced by the UK government to encourage people to invest in early-stage businesses with growth potential. Alongside Venture Capital Trusts (VCT) and Seed Enterprise Investment Schemes (SEIS), EIS is one of three tax-based Venture Capital Schemes (VCS).  

An EIS works somewhat similarly to a VCT but is arguably a riskier investment – while a VCT buys shares in one company, an EIS buys shares in various small, limited, companies.  

What are the benefits?

You receive 30% income tax relief on your contribution. You can contribute up to £1,000,000 (or £2,000,000 providing anything above £1,000,000 is a ‘knowledge intensive’ investment) per tax year. And your relief can be used to offset against your income tax liability for the previous tax year.  

What are the potential risks?

EIS investments can be unpredictable as you buy shares in early-stage companies, with their value often rising and falling more frequently than larger, more established companies. They can therefore be more suited to investors comfortable with high risk. 

Tax relief is never guaranteed. And investments may need to be held much longer than the minimum EIS holding period of three years.

Before making an investment, it is important that you discuss these risks with a Certified Financial Planner.

How do we plan for EIS?

Once your earnings exceed £100,000, tax penalties can become substantial. Understandably, many people are reluctant to pay such high tax costs for money they have worked so hard to accumulate. Many leave assets in their business as a result. 

EIS is a useful tool for business owners who want to take some capital out of the business and into their own name, ahead of when they expect to want to use the money. 

First Wealth therefore recommend EIS’s for business owners with substantial income who are looking for ways to reduce their tax burden. 

Talk to an adviser

Questions we get asked a lot

To invest in EIS, you can either invest directly in a single EIS-qualifying company or invest through a fund manager who will build an EIS portfolio for you.  

Your company can use the EIS scheme if it: 

  • Has permanent establishment in the UK. 
  • Is not trading on a recognised stock exchange at the time of the share issue (and does not plan to do so). 
  • Does not control another company other than qualifying subsidiaries. 
  • Is not controlled by another company or does not have more than 50% of its shares owned by another company. 
  • Does not expect to close after completing a project or series of projects.  

Your company and any qualifying subsidiaries must also: 

  • Not have growth assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards. 
  • Have less than 250 full-time equivalent employees at the time the shares are issued. 

Find out more on GOV.UK 

The maximum annual investment an investor can claim relief on is £1million, or £2 million if at least half is invested in knowledge-intensive companies.

EIS investors can claim up to 30% income tax relief on their EIS investments. In a single tax year, reliefs can be claimed at a maximum investment amount of £1 million (amounting to £300,000 of income tax relief).  

Investors may get tax reliefs in the tax year in which money is invested into a company. But this may be a different year to the one the investment is made into the EIS fund. 

In addition to this, investors in unapproved EIS funds may choose to treat an investment as if it were made in the previous tax year. A total of £2 million can therefore be invested in a tax year (£1 million in the current tax year and £1 million carried back to the previous tax year). 

If investors do not hold their shares and the company does not remain EIS-qualifying for three years, all tax reliefs must be paid back to HMRC. If income tax relief is accessed, it must be set against the income tax bill for a tax year. And it can only reduce your income tax bill to nil.  

The EIS scheme offers tax reliefs to individual investors who buy new shares in an EIS qualifying company. These EIS tax reliefs can only be claimed if the company follows the scheme rules.  

In the case that an EIS qualifying company does not follow the rules, tax reliefs will be withheld or withdrawn from investors.

When a gain is realised on the sale of other assets, these can be reinvested in EIS shares and the value of the gains can be deferred.  

To qualify for Capital Gains Deferral, reinvestment into EIS-qualifying shares must be made no earlier than 12 months prior to (or three years after) the original gain was made.  

When you do this, the gain will be deferred until whichever comes first: the EIS shares are sold; the company ceases to be EIS-qualifying within three years of investment; an investor is no longer a UK resident within three years of investment.   

When a deferred gain comes back into charge, it is then subject to capital gains tax (CGT) at the relevant rate.  

EIS investments focus on early-stage companies, which had the potential for significant growth. When selling there EIS shares, investors benefit from 100% tax-free growth in value. 

To benefit from tax-free growth, however, income tax relief must have been claimed (and not withdrawn by HMRC). Investors must also have held their investments (and the company must remain EIS-qualifying) for at least three years.

When claiming EIS tax relief, your EIS provider will give you either an EIS3 or EIS5 form. You will then need to pass this on to your accountant.   

EIS investors must hold the share for three years before claiming tax reliefs.  

In addition to this, the company must remain EIS-qualifying for a minimum of three years in order for investors to claim reliefs.  

EIS shares are not usually traded on the stock market. As a result, you cannot sell them in the way you might sell other investments.  

It is instead the managers’ responsibility to design an exit strategy in which capital and tax-free growth is returned to investors.  

The main alternatives are Venture Capital Trusts (VCT) and Seed Enterprise Investment Schemes (SEIS). 

A VCT gives investors exposure to a sector of smaller, VCT-qualifying companies who are not listed on the London Stock Exchange but have the potential to grow faster than larger, listed companies. Like EIS investments, VCT investors benefit from 30% income tax relief. This only applies, however, where the share has been held for at least five years.  

Investing in a VCT also gives investors tax-free capital gains. And, if your VCT pays dividends they will be tax-free too.  

When you make an SEIS investment, you invest in companies which are smaller and younger than EIS-qualifying companies. This means that your SEIS investment is riskier than an EIS.  

SEIS investors receive up to 50% Income Tax Relief each tax year (though the shares must have been held for at least three years). If you claim this Income Tax Relief, and the companies in which you are invested in are still SEIS-qualifying, your investments also have tax free growth. In addition to this, SEIS-qualifying companies offer 100% Inheritance Tax relief, so long as the investment has been held for at least two years at the time of death. And, finally, you may offset any losses against your Income Tax bill. 

When you hold EIS shares, you wait for the company to mature or realise an exit. 

This process must last a minimum of three years. But can often take longer due to the nature of the businesses EIS shares invest in and the fact that the shares have no liquidity.  

There is always a risk that the businesses you invest in don’t ever mature or realise an exit. In such a case, you can claim loss relief.  

EIS is one of the UK’s Venture Capital Schemes that aim to encourage private independent investment into smaller companies.  

Part of this includes the ability to simultaneously hold multiple schemes. When doing this, you are allowed to put a maximum investment amount into each. These maximums differ depending on the investment. EIS has a maximum of £1 million (unless you invest into ‘Knowledge Intensive’ industries, where the maximum is £2 million). For both SEIS and VCT, maximums are up to £200,000.   

You can claim tax relief from multiple venture capital schemes in the same year. For instance, you can claim relief on both EIS and SEIS at the same time.

EIS investments must be held for a minimum of three years.

If the company you invest in using an EIS fails, you can claim loss relief.  

In the case that a company your are invested in (via EIS) does fail, you will be notified by the provider of your investment. You will then be able to offset the loss by notifying HMRC on your self assessment.

There have been no recent changes to the EIS rules and regulations.  

It is important to remember that changes are possible, but we cannot predict what they will be. We don’t have a crystal ball. EIS is a government scheme and may therefore be subject to change when the government does.  

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