Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) allows investors to earn tax relief by putting their money behind small, up-and-coming businesses. Investors can benefit from the scheme either by investing in the businesses directly or through managed funds, both of which are accessible through investment companies. This guide will explain how the Enterprise Investment Scheme works, including its advantages and disadvantages. It will also lay out suitable alternatives for retail investors in the UK.
Venture Capital Trusts (VCTs) offered by popular platforms like Interactive Investor are an alternative to the Enterprise Investment Scheme (EIS). VCTs also reduce risk by splitting investments across many companies. VCTs also offer tax relief, including tax-free dividends.
Enterprise Investment Scheme Explained
The UK government introduced legislation for the EIS in 1994 as a way of attracting investment to small, unlisted businesses.
In short, the scheme offers various tax benefits such as capital gains tax deferrals and income tax relief to investors who hold their money in an EIS-qualifying company or fund for the required period.
The Enterprise Investment Scheme has proven to be very popular, attracting nearly £1.66 billion in investments during the 2021/22 tax year.
The government has also launched a Seed Enterprise Investment Scheme (SEIS), which works in a similar way to the EIS but is aimed specifically at startups.
How Do Enterprise Investment Schemes Work?
The Enterprise Investment Scheme and Seed Enterprise Investment Scheme are designed to attract money to small and startup businesses in the UK. Businesses can apply for the schemes by filling out the relevant application form and meeting certain criteria.
For a business to qualify under the EIS, it must:
- Be permanently based in the UK
- Not be trading or planning to trade on a recognised stock exchange
- Have gross assets worth less than £15 million when shares are issued
- Have less than 250 full-time employees
- Be involved in a qualifying trade, listed on the UK government’s website
For a business to qualify for SEIS funding, it must also be permanently based in the UK, a member of a qualifying trade, and not trading on a recognised exchange. But in this case, the company can have a maximum of £200,000 in gross assets when shares are issued and no more than 25 full-time employees.
Once the application is made and the authorities are satisfied that the company is eligible, it will receive a compliance certificate. As an investor, you should check if the company has one of these to be sure you will benefit from EIS/SEIS tax benefits.
Note that the qualifying companies you invest in must remain eligible for EIS or SEIS for at least three years for investors to take advantage of some of the schemes’ benefits.
As an investor, you must also remain a resident of the UK during this time.
There are several advantages and disadvantages of the Enterprise Investment Scheme scheme for investors.
Since the EIS and SEIS apply to smaller companies and startups, investments come with added risk and EIS-eligible companies could fold far more easily than the big firms.
Of course, the smaller companies also have the potential for much higher growth, and the UK government provides the following tax benefits for EIS and SEIS investors to mitigate the risks:
- Income Tax Relief – The HMRC allows investors to claim income tax relief of up to 30% on the amount they invest in the EIS, up to a maximum of £1 million per tax year. SEIS investors can claim 50% tax relief on up to £200,000 per year. There is ‘carry back’ of up to one year, allowing you to claim relief on income tax paid the previous year.
- Capital Gains Deferral – EIS and SEIS investors can defer capital gains tax for gains made on other investments, as long as they reinvest their gains in an EIS-qualifying company or fund. Gains within a four-year window starting 12 months before the EIS investment are eligible. The capital gains will need to be paid when the EIS shares are sold, or if the company or investor become ineligible for the scheme.
- Tax-Free Growth – Investors who claim tax relief from the scheme will also qualify for 100% tax-free capital gains on their EIS and SEIS shares, as long as they have held them for at least three years.
- Loss Relief – EIS investors can use any losses they make when they sell shares in companies on the scheme to offset part of their income tax. The loss can be from an individual company if you have an EIS portfolio. It is calculated after any income tax relief is taken into account, so if you have invested £100,000 into an EIS company and claimed £30,000 worth of tax relief, only losses that take the investment’s value below £70,000 will qualify.
- Inheritance Tax Relief – Any EIS holdings qualify for Business Property Relief, and can be passed on to beneficiaries without inheritance tax liability as long as the investment has been held for at least two years.
Tax Relief Example
An investor has recently sold an asset for £100,000 in profit and earns a salary of £100,000 per year. They are interested in investing in an EIS fund.
- By re-investing the £100,000 profit from their sale, the investor can defer payment of capital gains tax until they dispose of their EIS shares.
- If they invest the full £100,000 in EIS shares, they will be eligible for 30% income tax relief.
- If the EIS investment grows, the growth will be free of capital gains tax when these shares are sold (though the investor will still need to repay the deferred tax on the previous asset sale).
- If the investor makes a loss, they will be able to offset some of their losses through loss relief deducted from income tax.
Note, Enterprise Investment Scheme tax rules and requirements may change.
How To Take Advantage Of EIS
As long as you are a UK resident and the company you invest in has completed a compliance statement and successfully applied for the EIS or SEIS, you should be eligible for the scheme’s benefits.
You can claim income tax relief either the year you make the investment or the previous tax year, but you cannot carry forward unused income tax relief to following years.
Capital gains tax relief makes the gains you make from EIS or SEIS investments tax-free. So, you will not need to pay anything on these to HMRC, as long as you have claimed income tax relief on the investments, held them for three years and remained resident in the UK.
- Much higher risk than other stock investments
- Could lose benefits if the company becomes ineligible before you are able to claim
- Lacks tax-free dividends available from Venture Capital Trusts
- Not as straightforward as typical retail investments
- Requires high initial investments
Investing In The Enterprise Investment Scheme
Since EIS shares cannot be listed on any exchange, this is not the most straightforward investment for the retail market. While a great many brokers provide easy access to British and international stocks as well as funds, investment trusts and other assets, you won’t find these companies listed so you will need to find a firm that specialises in EIS/SEIS.
UK investors can find a selection of firms that offer EIS and SEIS investments by searching online. A good place to start is with the Enterprise Investment Scheme Association. Firms may offer ready-made EIS portfolios selected by a manager, individual companies or a mixture of the two.
Different firms also tend to focus on different sectors, so if you are specifically interested in tech startups, for example, it is worth shopping around until you find a firm that suits you.
Note that signing up for an EIS investment will almost certainly be a lengthier process than signing up with a standard broker. You may need to contact the firm directly to discuss your investment, rather than registering through an online form.
Moreover, these funds tend to require a far higher initial investment than most online brokers. Initial investments in the thousands are standard, with some funds requiring £10,000 or more to invest.
Investing in an EIS fund will also incur charges, and these may include an initial charge to set up your investment, an ongoing management fee paid yearly, and additional performance fees.
If you decide the Enterprise Investment Scheme is right for you, there are a few logical steps to take:
- Evaluate The Market – Look at multiple investment firms before settling on one. Different firms offer access to different markets; fees and minimum investment amounts also vary between brands.
- Research The Investments – Once you have made a shortlist of potential investment companies, you should take a closer look at the companies they have available for investment. Since these are startup companies, you should be sure you feel their business model and product make sense, and you should look for those that you feel provide something the market will want over at least the next three years.
- Weigh Up Your Investment – An EIS/SEIS investment is high risk, so it arguably works better as a supplement to a broader investing plan rather than the main part of your investments. Consider how much you can afford to invest, bearing in mind that you run the risk of losing all of your money.
- Time Your Investment – Carefully research and evaluate the tax benefits before you invest. By timing the investment correctly, you get the maximum use from income tax relief and other benefits.
Alternatives To EIS Investments
The best alternative to investing in EIS/SEIS companies is a Venture Capital Trust.
A VCT investor gets similar benefits to the EIS and SEIS schemes, but with the added bonus of also enjoying tax-free dividend payments. The trade-off is that VCT investments are not eligible for business property relief, so are still liable for inheritance tax.
Unlike EIS/SEIS investments, a Venture Capital Trust investment is not made in an individual company; rather, your money will be pooled with other investors’ funds.
Another difference is that businesses that are eligible for VCT funding can be listed on the London Stock Exchange’s Alternative Investment Market.
VCTs also tend to be easier to invest in, as UK residents can take advantage of products offered by popular online brokers such as Interactive Investor.
Should You Invest In An EIS/SEIS Scheme?
EIS and SEIS investments offer several tax benefits to investors in the UK, and since these deal with small, up-and-coming companies, they have the potential to grow. The flip side of this is that the promise of high rewards brings equally high risk, and generally investing requires a consequential sum of cash that many retail investors will be unwilling to put into such a venture.
The Enterprise Investment Scheme does have some unique advantages, and some of the investments doubtless have potential, particularly since they are generally young companies. But for many, the tax-free dividends and accessible nature of Venture Capital Trusts will be attractive.
What Is The Enterprise Investment Scheme?
The UK government set up the Enterprise Investment Scheme to encourage investment into smaller companies. The statistics show that it has been a great success, raising around £24 billion in funds for nearly 33,000 qualifying companies since its launch in 1994.
Investors in the EIS will gain several significant benefits, including CGT deferrals and relief, income tax relief, loss relief and inheritance tax exceptions.
Can Anyone Invest In EIS?
You will need to be resident in the UK for three years after buying shares in a qualifying company or fund to take full advantage of the benefits the HMRC offers EIS and SEIS investors.
What Is The Enterprise Investment Scheme’s Tax Relief?
EIS investors can take advantage of several tax benefits. They can receive 30% income tax relief on investments to the tune of £1 million. When they successfully claim income tax relief on an EIS investment, any capital gains will also be shielded from tax as long as the company remains eligible for the scheme for three years and the investor remains in the country.
How Does The Seed Enterprise Investment Scheme Work?
The UK government launched the Seed Enterprise Investment Scheme (SEIS) in 2012 to encourage investment in startups. The SEIS works in a similar way to the EIS, but instead of income tax relief of 30% on up to £1 million of investments, SEIS investors will gain 50% tax relief on capital up to £200,000.
As with the EIS, gains from the Seed Enterprise Investment Scheme are free from capital gains tax and when passed on to a beneficiary are also exempt from inheritance tax.
How Do You Invest In The Enterprise Investment Scheme?
The best way for retail investors to benefit from the EIS is to find an investment company that specialises in the scheme. A list of companies can be found through the Enterprise Investment Scheme Association. Some of the popular EIS companies include Puma, Octopus Investments and MMC Ventures.
Where Can I Learn More About The Enterprise Investment Scheme?
The best place to learn more detail about this scheme is the UK government’s website. You can also learn about EIS and SEIS tax implications by reading the HMRC manual and helpsheet.