Introduction to EIS
The Enterprise Invest Scheme, often referred to by its acronym of EIS, is a UK government scheme designed to stimulate private investment in qualifying start-ups through the provision of attractive tax breaks. These include EIS investors being able to claim initial income tax relief of 30% of investment worth up to £1 million per tax year, EIS investments not being subject to Capital Gains or Inheritance Tax and additional tax breaks designed to reduce the risk level of equity investments in private companies.
In addition to the Enterprise Investment Scheme, the government additionally runs the Seed Enterprise Investment Scheme (SEIS). SEIS is similar to EIS but is designed to support investment in smaller, younger companies than would be typical of EIS investment offers. Tax relief available to SEIS investors is similar but even more generous than the allowances that come with EIS investments.
EIS tax relief
Not only can investors receive up to 30% Income Tax Relief, this can be claimed in either the tax year of the investment or the previous tax year to represent a highly adaptable opportunity.
Tax Free Growth
Thanks to their tax-efficient structure, any profit made from EIS investments is entirely exempt from Capital Gains Tax allowing profits to build up tax-free for an added level of flexibility.
Capital Gains Tax Deferral
Benefit from tax deferred withdrawals on the capital gains from your EIS and the option to tailor to personal investment goals, with the choice to defer gains for one year before or three years after the date the gain originally arose.
100% Inheritance Tax Relief
Enjoy the dual benefit of Business Property Relief and 100% Inheritance Tax Relief on your EIS shares for minimum liability and maximum efficiency with your investment. Shares must have been held for two years prior to the date of death in order to qualify.
Certain investors may be able to access loss relief either in the tax year when they realise the loss or in the following tax year.
EIS Qualifying Companies
For companies to qualify as EIS investments, they must, among other conditions, not have made their first commercial sale more than 7 years earlier, be permanently established in the UK, have less than 250 full-time equivalent employees at the time the shares are issued and not have gross assets worth more than £15 million before any shares are issued. Immediately after shares are issued under an EIS investment round, gross assets must not exceed a value of more than £16 million.
Companies can raise up to £5 million a year through the Enterprise Investment Scheme, and £12 million overall. Any investment sums raised through other government-backed venture schemes do go towards that total. That means if a company had already raised £1 million in venture capital via the SEIS scheme, that would be included in their maximum £5 million annual (if they SEIS round took place earlier in the same year) and £12 million lifetime allowance.
For full, detailed information on EIS tax qualification criteria for businesses interesting in raising venture capital through the scheme, as well as other important information, please visit our EIS for Businesses page.
Why The Enterprise Investment Scheme Is A Win-Win For Companies And Investors
The Enterprise Investment Scheme was launched in 1993, replacing the Business Start-Up Scheme which had been in place since 1981. The purpose of the scheme, and the generous tax relief that supports it, is to reward private individuals for investing in promising start-ups from the UK.
In turn, the government benefits from more young British companies gaining access to the funding they need to grow. That ultimately leads to more tax returning to the exchequer in the form of taxes from particular companies and a healthy economy built on thriving domestic companies creating jobs and economic activity.
Private individuals who qualify as sophisticated investors or high net worth individuals and can make informed decisions on higher risk investments gain risk-adjusted opportunities to invest in companies that will provide potentially very attractive returns if they develop as hoped. If they don’t, investing in young private companies is a high risk strategy, and the investor suffers a loss, part of that loss is also deductible against income tax.
The combination of the various tax reliefs EIS investors are eligible for, both at the time of investment and after it ultimately proves to deliver a return or loss, significantly adjusts the risk profile of a start-up investment. EIS makes investing in start-ups more attractive to investors, which is good for them, good for EIS-qualifying British companies and good for the UK economy as a whole.
Venture Capital Raised Via EIS Must Be ‘At Risk’
Companies that raise money through the Enterprise Investment Scheme must demonstrate they use the venture capital for growth and development and that the capital is at risk. A result on that requirement is that companies dealing in land, property development, commodities, banking, insurance or money-lending, providing legal or accountancy services or generating or exporting power are not eligible to raise capital through EIS.