The Enterprise Investment Scheme (EIS) has been around since 1992, so although it’s not a new initiative, it’s certainly gaining traction as a tax-efficient way to invest and raise capital.
Table of contents
- Qualification Criteria for EIS Status
- EIS Rules for Investors
- Tax Reliefs Available Through EIS
- EIS Advance Assurance
- All You Need To Know About EIS Investments FAQ
- Related Articles, Guides and Insights
- Questions or Comments?
Although there is a fair bit of terminology to wade through, the concept is simple – EIS supports early-stage businesses in accelerating growth by attracting investors with a range of tax reliefs.
The basics are that:
- Investors can claim significant Income Tax relief of up to 30 per cent.
- They also get Capital Gains reliefs up to 50 per cent of the invested value.
The latest figures from the Enterprise Investment Scheme Association (EISA) show that, in 2019-20, UK businesses raised just over £1.9 billion through the scheme.
Companies raised £170 million through the related Seed Enterprise Investment Scheme (SEIS), a similar program, although focused on brand new startups.
Qualification Criteria for EIS Status
The business needs to meet a set of eligibility rules before applying for EIS recognition.
HMRC decides a business’s EIS status based on several factors, including:
- Having a UK business location.
- Not being listed on any stock exchange.
- Employing fewer than 250 full-time staff.
- Owning assets worth less than £15 million.
- Conducting a trade in a qualifying area.
- Not being in control of another company.
- Being independent (without 50 per cent of shares owned by another business).
Businesses need to be early-stage, so their first commercial transaction must have occurred within the last seven years. They must intend to use the funds to continue trading, start a new trade, or invest in research and development.
There are a few exemptions, particularly regarding knowledge-intensive companies (KICs) – we’ll explain more about what that means shortly.
KICs can apply with a higher threshold of 500 staff and may have been operating for 12 years as a maximum.
The capital raised is capped at £5 million per year, and £12 million total, including other venture capital, raises such as SEIS.
Knowledge Intensive EIS Companies
A knowledge-intensive company or KIC is a business that works primarily in innovation, research or development, and this is their function at the time of the share issue.
KICs have special EIS status and can raise higher investment thresholds with more flexible qualification requirements.
EIS Rules for Investors
If you’re interested in buying shares in an EIS firm, you’ll also need to meet a few conditions.
EIS investors must:
- Be UK taxpayers.
- Invest up to £1 million total per tax year.
- Retain the shares for at least three years.
- Buy new shares not already on the market.
- Not carry forward EIS tax relief.
- Own less than 30 per cent of the share capital.
Company employees paid directors, and partners cannot usually invest in an EIS raise unless they become a director after buying EIS shares.
Tax Reliefs Available Through EIS
Of course, investing in small, unlisted, relatively new businesses is a high-risk endeavour, and there are no guarantees that your selected companies will succeed.
The tax incentives offered are a buffer intended to mitigate the impact of investment losses that don’t go to plan and further augment the effect of EIS investments that do.
Income Tax Relief
An investment of £100,000 could result in Income Tax relief of up to £30,000 against your tax bill – although you need to keep the shares for three years and have a high enough liability to make full use of the relief.
You can invest up to £1 million per tax year (across any number of EIS enterprises).
If the company is considered a knowledge-intensive organisation, that limit doubles to £2 million.
Tax Relief Carry Backs
Investors can’t carry over EIS Income Tax relief from one year to the next, but they can carry it back to offset their Income Tax payable for the previous year.
Taxpayers that have settled their obligation for the tax year before can claim a refund up to the 30 per cent relief.
Capital Gains Tax Allowances
Most EIS shares are not liable for any Capital Gains Tax (CGT) against profits made, provided you have claimed Income Tax relief, and the company remains eligible.
Gains made when selling, exchanging or transferring shares that are reinvested into another EIS firm mean that the CGT liability is deferred for as long as you keep the money invested and the organisation meets the EIS conditions.
There are no limits on the size of gains you can defer, which applies to profits made up to three years before, and one year after the investment.
Even if you’ve already paid CGT, you can still defer the gain – once you extract your investment, the CGT becomes payable at the current rate.
Some investors choose to reinvest and defer the gain indefinitely.
Inheritance Tax Relief
As long as the shares have been held for two years, if an investor passes away, their beneficiaries benefit from 100 per cent Inheritance Tax relief.
EIS Loss Relief
If the company folds, the loss relief reduces the financial impact. That means you offset the amount lost, less the Income Tax relief you’ve claimed.
In effect, an additional rate taxpayer could minimise a loss of £1 to £0.385.
To illustrate how loss reliefs work, we’ve summarised the net costs and overall gains and losses in various scenarios, whether the business grows, remains static or drops in value.
|Company Folds||Value Drops by 50 per cent||Investment Remains Static||Value Grows by 50 per cent|
|Investment net of tax relief||£70,000||£70,000||£70,000||£70,000|
|Current share value||£0||£50,000||£100,000||£150,000|
|Gain or loss after tax relief||(£38,500) or -38.5 per cent||(£11,000) or -11 per cent||£30,000 or +30 per cent||£80,000 or +80 per cent|
EIS Advance Assurance
EIS is managed by the Small Company Enterprise Centre, part of HMRC, and this is the body that decides whether an applying business meets the EIS criteria.
Many new EIS raises are listed as having Advance Assurance – a bit like an agreement in principle on a mortgage.
That status acts as provisional approval. Although it doesn’t guarantee that the SCEC will grant EIS status, it’s usually seen as an indication that the company is likely to qualify.
Advance Assurance exists because applications work in a roundabout way. Businesses can’t formally qualify until they have already received investments but need to show EIS status to attract investors.
Having Advance Assurance isn’t compulsory, but many businesses find this the easiest way to incentivise investors.
To apply, companies need to explain how they are raising finances, their business structure and trading activities, and provide a copy of the business plan.
All You Need To Know About EIS Investments FAQ
Before you can claim EIS tax relief, you need to have received an EIS3 certificate from the business, which can take a few months to issue.
Normally, you’d claim your relief when submitting your tax return and can present a supplementary tax return if you don’t have any other income streams or pay tax solely through PAYE employment.
If you’ve made a loss on EIS shares and wish to claim loss relief, you can submit a claim up to four years from the end of the tax year in which you sold the shares or the company folded.
Yes, you can carry back some or all of your EIS investment to the year before, provided you haven’t reached the tax relief limit.
Investors can claim relief for up to five years from the next 31st of January after the end of the tax year when they invested.
Most EIS shares do not attract any Capital Gains Tax – when you realise those shares if you have claimed Income Tax relief and the business still qualifies, there isn’t a CGT charge payable.
The CGT allowances are incentives rather than tax reliefs, encouraging investors to keep their shares for the three-year minimum and reinvest in EIS businesses as a longer-term investment.
No, employees do not qualify for EIS tax relief. Directors can invest in their own EIS business if they are unpaid or weren’t connected with the company before making their investment.
Companies can choose to invest in another EIS enterprise, but the tax reliefs are only available to private investors.
EIS is aimed at unlisted companies, so they cannot be quoted on any stock exchange. However, businesses listed on AIM are treated as unquoted for EIS purposes.
Eligible firms must be a trading business and meet several other qualification rules relating to the company’s size, the number of staff, and the value of its net assets.
Related Articles, Guides and Insights
Below is a list of some related articles, guides and insights that you may find of interest.
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