The Enterprise Investment Scheme (EIS) is a tax relief scheme introduced in the UK to increase economic growth by encouraging investment into start-up and early-stage businesses. It does so by offering investors significant tax breaks. When investors provide funding into qualifying businesses through EIS, they can receive both income tax relief and capital gains tax (CGT) relief.
What tax benefits do investors receive from EIS?
EIS investments are a particularly attractive investment opportunity for many investors because they offer such generous tax benefits. Some of the tax benefits can be received relatively quickly from when an investment is first made, whilst others require the investor to hold onto their investment (shares in the company) for a period of time in order to qualify for additional tax benefits.
- Income tax relief: Investors receive 30% of the value of their investment back as income tax relief. As an example, were you to provide £30,000 as EIS investment, you would receive £9,000 to offset against your income tax.
- Capital gains tax relief: Investors must hold onto shares for a minimum of 3 years to be eligible to claim CGT relief on the investment. Where investors qualify, once shares are sold, any gain made will be entirely tax-free.
- Capital gains tax deferral: Where an investor makes a disposal of any asset that attracts CGT, they can defer this payment so long as the proceeds are put towards EIS investments. However, once shares are sold, CGT payment will be due. This can still be beneficial where the first asset disposed of is residential property as these attract a higher rate of CGT than other assets such as shares (18% as opposed to 10% for basic rate taxpayers and 28% instead of 20% for higher and additional rate taxpayers).
- Loss relief: If the investment made is not profitable and the company fails, loss relief is available to minimise the amount of loss to the investor. The loss relief amount equates to the rate of income tax the investor pays. The maximum is therefore 45% for additional rate taxpayers. Using the same example of a £30,000 investment in a scenario where the company fails, 30% of this amount would have been received back as income tax relief, leaving £21,000 of capital at risk. Applying a 45% rate for an additional rate taxpayer, the investor would then receive a further £9,450 back in income tax relief. This leave a loss of £11,550 from an initial £30,000 investment.
- Carry-back income tax relief: Although you cannot carry forwards any income tax relief, you can apply the tax relief to a previous year so long as you have not reached the limit of £1,000,000 in EIS shares for that year. If you make a £30,000 EIS investment in the tax year 2022/23 and want to apply the 30% income tax relief to the 2021/22 tax year, you could claim a refund of £9,000 so long as you do not exceed the limit.
- Inheritance tax relief: Where you hold EIS shares for at least two years, you are able to pass this on without the beneficiary suffering inheritance tax on the value of the shares. However, this relief is only available if the shares are not listed on a recognised stock exchange.
How to qualify as an investor for EIS investment
As the tax incentives for investors are substantial, there are certain conditions imposed to prevent misuse of the tax scheme. Investors must meet all the requirements listed below:
- EIS tax benefits are only available to UK taxpayers.
- The maximum amount that can be put through EIS is £1 million per year (the allowance increases to £2 million if investment is made into knowledge-intensive companies), however this can be spread over a number of different qualifying companies.
- Investors must hold onto the shares for a minimum of 3 years to qualify for CGT relief. If shares are disposed of before fulfilling this period, either through sale or gift, then there will be a clawback of any tax relief received.
- Investors cannot be connected to the EIS company with “connected” being defined as being an employee, a partner or paid director of the company. This also includes people who are related or associated with the investor such as family members or business partners.
- Investors cannot either independently or together with associates hold more than 30% of the company’s shares or voting rights.
- Investors must also be buying new shares which are not currently on the market.
How to make EIS Investments
There are two different routes you can take to make an EIS investment. Which you choose will be dependent on personal preference and your individual circumstance as both have advantages and disadvantages.
The first option is to invest directly in a company which qualifies for EIS. You may choose to do this where there is a specific company you’re interested in supporting by investing in their business venture. By doing this you’ll gain more control over your investment and have greater visibility on how the company is performing. However, the downside is that the profitability of your investment becomes entirely reliant upon the one company becoming a success. As with all investments of course, there is no guarantee, and so this can be seen as higher risk.
The second option is to invest into a fund where your money is put towards a mixed portfolio of different EIS-qualified companies. This usually involves working with a professional fund manager who will carry out research on the types of eligible companies to suit your requirements. It allows you to spread your risk over multiple companies, but does restrict your ability to completely choose which companies you invest in. Furthermore, this method of investing will involve additional costs for fund management.
Due to the nature of EIS shares not being listed on the open stock markets you may find it difficult to find eligible companies. Joining angel investor networking groups is one way to meet companies for yourself. Another way is to turn to online platforms which allow companies and investors to mutually seek out each other, but you should make sure that any such platforms are regulated by the Financial Conduct Authority (FCA). Alternatively, you can decide to use a specialist broker who will be able to find companies or suggest groups of companies to create a fund for a portfolio.
How much does it cost to invest in EIS?
How much you want to invest through EIS is ultimately up to you. There is no minimum amount of investment required in order to qualify for the tax relief. However, you should bear in mind that it will be likely that you will need to enlist a range of professionals to help you set up your investment. They can range from solicitors to check contracts, accountants to claim tax relief and fund managers should you choose to go down that route.
Some typical costs to be aware of include:
- Initial set up fee
- Annual management charge
- Custodian fees
- Administration fee
- Exit fee
- Performance fees
Who should invest in EIS?
It should be said that EIS investment is not for everyone, and particularly not for beginners who are just beginning to explore investment opportunities. Individuals who are serious about investing in EIS should ensure that they have a large enough tax liability in order to benefit from the tax relief rewards. EIS investments are considered high-risk and so those seeking more stable investment opportunities should consider alternatives. Furthermore, as one of the key requirements is that investors must hold onto shares for a minimum of three years, this may not be suitable for those looking for shorter term investments.
Typical EIS investors often include those:
- With large income tax bills
- With significant capital gain from disposing of assets and are looking to defer paying CGT
- Who have received a tax-free lump sum from a pension and are looking to reinvest to receive tax relief
- Who have reached the maximum threshold for pension contributions and the Lifetime Allowance
Limited companies can also invest in EIS eligible companies if they wish, however the company entity is unable to receive any tax relief benefits such as corporation tax relief. Tax relief is only available to individuals.