EIS Investments Explained

Introduced by the UK Government in 1994, the Enterprise Investment Scheme (EIS) is a scheme which was set up to encourage investors to put their money into small-and-medium sized, higher-risk businesses, by offering them incentives – the primary being significant tax reliefs.

Here, we outline what an EIS investment scheme is, as well as the benefits to investors and the regulations currently in place.

What is an EIS?

The EIS is a scheme that was introduced by the UK Government to help new, small-or-medium-sized companies raise the necessary finances to help kick-start their business, by offering incentives to would-be investors through substantial tax reliefs.

Of course, investing in these types of businesses may be seen as very risky, but small businesses and start-ups can grow extremely quickly. An investor may be more likely to lose their money, but, on the other hand, they may see their investment grow by a colossal amount.

EIS tax reliefs

Since the scheme’s inception, over 26,000 companies have received investments, helping many SMEs raise finance. Individual UK investors also benefit from seeing generous tax reliefs, including:

  • Income tax relief – Individual investors can benefit from a 30% income tax relief up to £1million invested per tax year. This means that for £10,000 invested in an EIS-eligible business, £3,000 of that will come off the income tax in that investment year.
    If the company the investor is investing in falls into the “knowledge-intensive” business category, the cap is £2million per tax year.
  • No capital gains tax – A capital gains exemption exists for any profits made on shares that have been held for three years or more. This means that if £10,000 was invested, then if the share is sold five years later for double that, the investor can still get the full £10,000 profit.
  • No inheritance tax to be paid on the shares held for a minimum of two years, which are purchased through EIS.
  • Loss relief – If the company invested in fails, there is a loss relief on the at-risk capital, multiplied by the investors’ tax rate.

EIS funds

The EIS scheme was initially set up to encourage individual investors to directly invest in small companies. That being said, there are now several EIS funds, which are managed investments where professional fund managers select the right companies to invest in on your behalf.

EIS funds allow investors to spread risk across several investments, helping to build and diversify their portfolio, with particular focus on start-ups and smaller businesses.

EIS regulations

Since the aim of the EIS scheme is to attract outside investors, those applying for EIS should not be “connected” to the company that they are investing in, otherwise, they will not be able to qualify for the income tax relief benefits associated with the scheme. Being “connected” means being a paid employee, partner or director of the company. Unpaid directors are an exception, and in these cases, the income tax relief can still be claimed.

Likewise, a connection is established where an investor (or their associates) has a 30% or more interest in the company or any of its subsidiaries. Relatives or business partners of connected persons are also denied EIS tax relief.

It is important to note that many trade types are excluded from the EIS scheme, such as those in legal or accounting, hotels and nursing homes, and banking companies. Moreover, companies being invested in must also have less than 250 full-time employees and less than £15million gross assets before shares are issued.

Those who wish to ascertain whether their investment will qualify for EIS tax benefits can ask the company to obtain an “advance assurance” from HMRC, in order to give them peace of mind before they decide to invest.