The Enterprise Investment Scheme (EIS) is a government-backed scheme designed to help startups and other small businesses raise finance to accelerate the growth of the business.
The EIS does this by providing a range of tax reliefs to investors who make financial investments in these companies.
The scheme was created because the government recognises that early-stage businesses pose higher risks. Yet, they play a crucial role in the country’s economy and are often behind some of the most innovative products and solutions.
Through the scheme, investors can claim up to 30% income tax relief on up to £1 million in investments in businesses eligible for the Enterprise Investment Scheme.
This makes investing in growing companies an attractive proposition, with the potential for high target returns, and generous tax reliefs.
The main areas where investors can find this tax relief are:
Income tax relief
Investors can 30% tax relief on investments of up to £1 million in a tax year. This means the total tax reduction allowable is £300,000 (provided the investor has sufficient Income Tax Liability to cover it).
In the case of shares being disposed of at a loss, investors can elect to deduct the amount of the loss against income in the year the shares were disposed of.
Capital gains tax exemption (CGT)
Gains are exempt from capital gains tax if income tax relief was claimed on them and they have been held for at least three years. Investors can also choose to accrue CGT over a longer period if they hold onto the shares.
Inheritance tax exemption
Provided certain conditions are met, investors who have owned shares in qualifying companies for at least two years are eligible for inheritance tax business property relief. This is available up to 100% and reduces inheritance tax liability to nil.
Companies That Can Use the EIS
Companies are required to submit an application to the Venture Capital Reliefs Team at HM Revenue and Customs.
To be eligible for EIS, companies must meet the following criteria:
- Must be a permanent establishment in the UK
- Must not be controlling another company (except qualifying subsidiaries)
- Must not be trading on a recognised stock exchange when issuing shares
- Does not have plans to close the business after completing current projects
- Does not have more than 50% of shares owned by another company
Investors Who Are Eligible for EIS Relief
In order for an investor to qualify for EIS relief, they must meet the following criteria:
- Not already own shares in the company that are not part of the EIS or SEIS (except subscriber shares)
- Not be an employee or director of the company
- Not hold more than 30% of the company, this includes in partnership with other investors
Advantages of EIS investments
There are various advantages of EIS investments, for both companies and investors.
For companies, the main advantages are:
- Being able to attract more investors due to the tax breaks
- Potential to be mentored and use the expertise and contacts of investors
- Raising funds to accelerate the growth of the business
For investors, the main advantages are:
- The chance to obtain shares in a growing business
- Various tax reliefs as covered above
- Reduced risk in the event of the company failing