An Enterprise Investment Scheme (EIS) is a UK government initiative designed to encourage investment in small, high-risk companies by offering investors a range of attractive tax reliefs. Introduced in 1994, the scheme aims to help these businesses raise capital while providing investors with tax incentives to compensate for the higher risks associated with investing in startups or early-stage businesses.
Investors can invest up to £1 million per tax year (or up to £2 million if the investment is in “knowledge-intensive” companies) and receive a number of tax benefits. To qualify, the company must meet certain criteria, such as being unlisted and having gross assets of no more than £15 million at the time of investment. The company must also have fewer than 250 full-time employees and must be involved in a qualifying trade. The money raised through EIS must be used for the company’s growth and development.
Income Tax Relief
Investors can claim 30% income tax relief on the amount invested in qualifying EIS companies, up to the £1 million (or £2 million for knowledge-intensive companies) limit. This means that if you invest £100,000, you can reduce your income tax bill by £30,000. However, the investment must be held for at least three years to retain this benefit.
Inhertiance Tax Relief
EIS shares can also qualify for 100% relief from inheritance tax if they are held for at least two years and are still held at the time of the investor's death, making it a useful tool for estate planning.
Capital Gains Tax Exemption
If you hold the EIS shares for at least three years and then sell them, any gains made on the sale of the shares are free from capital gains tax, providing a substantial tax-saving opportunity.
Loss Relief
EIS investments are considered high-risk, so if the investment does not perform well and you make a loss when you sell your shares, you can offset that loss against your income or capital gains tax bill. This reduces the financial impact of any losses.
Capital Gains Deferral
Investors can defer capital gains tax on other assets by investing the gains in an EIS-qualifying company. As long as the EIS shares are held, the deferred tax is not payable.
While the tax reliefs can be highly attractive, it’s important to remember that EIS investments are in small, often early-stage companies, which carry a higher risk of failure than established businesses. Investors could lose some or all of their capital, so EIS is generally more suitable for experienced investors who can afford the potential losses.
The EIS offers a range of generous tax incentives for those willing to invest in small, high-risk companies. While the rewards can be significant, particularly in terms of tax savings, these investments are not without risk, so they should be approached with caution and ideally as part of a diversified portfolio.
If you have any questions regarding an enterprise investment scheme please get in touch with our team of qualified financial advisers for a no obligation chat.
Imogen Tallent
Financial Adviser
The UK Office for Budget Responsibility forecast is that in the 2024-2025 tax year Inheritance Tax will raise £8.3 billion for the Treasury.
Estate planning is the process of arranging how your assets (such as property, money, and possessions) will be managed and distributed after your death.
It’s important because it ensures your wishes are followed, reduces inheritance tax liabilities and helps prevent disputes among beneficiaries. It can also include making arrangements for your long term care if you become unable to make decisions yourself.
EIS provides several tax advantages, including:
- 30% income tax relief on investments up to £1 million (or £2 million if investing in knowledge-intensive companies).
- Capital gains tax (CGT) exemption on gains from the sale of EIS shares after at least 3 years.
- Loss relief: If your investment performs poorly, you may be able to offset the loss against your income tax.
- CGT deferral: You can defer capital gains tax on other assets by reinvesting in an EIS-qualifying company.
To receive the tax reliefs, you must hold your EIS shares for at least 3 years from the date of investment. If you sell the shares before this period, you may lose the tax reliefs, and the tax benefits would be clawed back.
Most UK taxpayers can invest in an EIS, provided they are at least 18 years old and do not already hold a significant shareholding (more than 30%) in the company they’re investing in. EIS is typically used by individuals with higher net worth or those seeking tax-efficient investment opportunities, but professional advice is recommended to ensure eligibility and suitability.
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