Enterprise Investment Schemes (EIS) were introduced by the Government in 1994 to encourage equity investment in higher-risk, unquoted (private), small-to-medium-sized enterprises (SMEs) in the UK.
EIS offered a range of investment tax reliefs to external private investors as an incentive to help fund the growth of these SMEs.
Investment tax reliefs available under Enterprise Investment Schemes:
The investment tax reliefs available to qualifying investors include income tax relief, capital gains tax exemption and capital loss relief.
1. Income tax relief
Income tax relief of 30% can be claimed against a maximum investment amount of £1 million in an EIS qualifying company. The tax relief can be claimed in the tax year in which the investment is made or it can be carried back to the previous tax year.
The amount of relief is restricted to amount of tax paid by the investor (I.e. you cannot recover more than you have paid in income tax). In practical terms, an investment of £10,000 in EIS qualifying shares will create a tax refund or credit from HMRC of £3,000.
2. Capital gains tax exemption
A capital gains tax (CGT) exemption can be claimed where a qualifying investor holds EIS shares for at least three years.
Effectively, no capital gains tax liability will be payable on the profit generated from the disposal of shares in EIS qualifying companies.
3. Capital loss relief
Capital loss relief allows an investor to offset an investment loss made on a qualifying EIS company. The capital loss can be offset against either the income tax liability or capital gains tax liability. The loss relief can be claimed either in the tax year when the loss was realised or in the following tax year.
In practical terms, where an investment of £10,000 is sold for say £2,000, this creates a gross loss of £8,000. Once the initial income tax relief of 30% (£3,000) is taken into account, this means a net loss of £5,000. A 40% tax payer could claim a further £2,000 capital loss relief on the investment (40% of the £5,000 net loss).
In other words, a £10,000 investment which sold for £2,000 could attract total investment tax reliefs of £5,000. The tax reliefs would reduce the loss on the investment from £8,000 to £3,000.
4. Other investment tax reliefs
Other investment tax reliefs include a CGT deferral (or reinvestment) relief and an inheritance tax exemption.
BDO, a firm of tax advisers, have created a table showing the total potential tax reliefs available on a £100,000 investment could be as high as £98,000.
In other words, the potential net cost of a £100,000 investment in an EIS qualifying company could be as little as £2,000, although you would need to die for that to happen!
What is an EIS qualifying company?
There are detailed rules around what type of companies qualify under the Enterprise Investment Scheme. For example, the company’s gross assets must not exceed £15 million, it must have fewer than 250 employees and be established for less than seven years.
In addition, companies that engage in specific activities (for example, property development; banking; insurance; lending; farming; hotels) are excluded.
Qualifying companies are permitted to raise £5 million in equity finance in the first year of the Scheme and have a £12 million lifetime investment limit.
Evidence of EIS certification
From an investor’s perspective, before committing any funds under an EIS, the company should be able to produce either an ‘advance assurance’ letter from HMRC (stating that it expects EIS relief will be granted) or once the company has been trading for at least four months, the company can apply to HMRC for EIS certification.
Making a claim for investment tax relief
Once investment has been made and shares issued, then the investor should receive an EIS3 Certificate to enable a valid tax relief claim to be made.
Claims for tax relief can be made within five years of 31st January after the end of the tax year in which the investment is made
Rules for Knowledge Intensive companies?
Knowledge Intensive companies are organisations that are engaged in research, development or innovation and are carrying out this work to create intellectual property.
Companies that meet these criteria also qualify for EIS although the definition of eligible company and investor limits are enhanced.
For example, qualifying companies are allowed up to 500 employees and have been trading for up to ten years. The ten-year clock starts in the year after their annual turnover reaches £200k.
For investors, the same investment tax reliefs (above) apply but the maximum investment allowance permitted is increased to £2 million.
Qualifying companies are permitted to raise £10 million in equity finance in the first year of the Scheme and have a £20 million lifetime investment limit.
What’s the difference between an EIS and SEIS?
The main differences are summarised as follows:
Criteria |
EIS |
SEIS |
| Maximum amount of investment | £1 million | £100,000 |
| Income tax relief | 30% | 50% |
| Capital gains tax disposal relief | 100% | 100% |
| Capital gains tax re-investment relief | 100% of gain | 50% of gain |
| Capital loss relief | Yes | Yes |
| Inheritance tax relief | Yes | Yes |
Qualifying company: |
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| Gross assets | <£15 million | <£200,000 |
| No. of employees | <250 | <25 |
| Trading history | <7 years | <2 years |
For more information on Seed Enterprise Investment Schemes (SEIS) please click here.
Risks
While the availability of investment tax reliefs provides an attractive financial incentive to invest in EIS qualifying companies, investors should keep in mind that these companies are high risk and as such there is a higher probability of incurring a capital loss.
In addition, EIS companies are unquoted, so it may be difficult to sell your shares at a time of your choosing or to obtain a meaningful and acceptable market value for those shares.
Further information
The rules around Enterprise Investment Schemes are quite complex and HMRC has produced a help sheet which comprehensively explains the scheme.
In addition, EISA – the Enterprise Investment Scheme Association- has produced a Guide giving investors an overview of how EIS work.
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