Enterprise Investment Scheme

The EIS is a package of tax reliefs that was introduced to encourage equity investments in small unquoted companies carrying on a qualifying trade.

Investing in small businesses often carries a high risk, and the tax reliefs on offer are intended to offer some compensation to the investors for that risk and make investing more attractive. Launched in 1994 as the successor to the Business Expansion Scheme, and with the aim of encouraging private investment into unlisted companies, the Enterprise Investment Scheme has promoted investment of over £9.7 Billion since it started.

Watch a video about how EIS tax relief works

TAX RELIEF FOR INVESTORS

There are five tax reliefs available to investors in companies qualifying under EIS, and the basic rules are as follows:

Income Tax Relief
  • 30% of the amount invested can be offset against personal income tax liability
  • Shares must be held for at least 3 years
  • No minimum amount of investment
  • Maximum qualifying investments of £1m in any tax year – i.e. maximum tax relief £150,000
  • Shares must be fully paid for when issued and be full-risk Ordinary shares
Capital Gains Tax Exemption
  • Any gains on the sale of the shares are exempt from CGT
  • Shares must be held for at least 3 years
  • Income Tax relief must have been claimed
Loss Relief
  • If EIS shares are disposed of at a loss, this loss can be offset against the investor’s income tax or capital tax liabilities in the year of disposal or previous year
  • The loss on which tax relief is given is net of any income tax relief obtained when the investment was made
Inheritance Tax Relief
  • Shares in EIS qualifying companies will normally qualify for Business Property Relief for Inheritance Tax purposes.
  • Relief can be up to 100% so long as the shares are held for at least 2 years

A summary of income tax relief for a 40% taxpayer who makes a qualifying EIS investment of £50,000, and the company subsequently goes under resulting in a total loss for the investor is:

Income Tax relief (£50,000 x 30%) £15,000
Loss relief (£50,000 - £15,000) x 40% £14,000
Total Income Tax relief £29,000 (58% of investment)

INVESTOR RESTRICTIONS

Investors who are connected to the company are not eligible for Income Tax relief on EIS investments. The connection can be defined in two ways:

Connection by Financial Interest
  • An individual is connected to a company if they control or own more than 30% of the issued share capital or voting rights
  • These conditions apply to 2 years before and 3 years after the investment is made
  • All shares owned by business partners and direct relatives (excluding brothers and sisters) are included in these restrictions
Connection by Employment
  • Partners, directors and employees of a company are connected to it and therefore ineligible
  • These conditions apply to 2 years before and 3 years after the investment is made
  • There is an exclusion for Business Angels who are investors and directors in a company but do not take a salary
QUALIFYING COMPANIES

There are EIS qualifying conditions for companies to meet both in terms of their nature and size, and in respect of the trade that they undertake. Firstly, companies must tick all of these qualifying criteria:

  • Unquoted limited company (AIM listed companies are eligible)
  • Less than 250 full-time employees
  • Gross assets less than £15m
  • Must not be controlled by another company
  • Subsidiary companies must be qualifying companies
  • Carry on a qualifying trade
  • Be UK resident or have a permanent establishment in the UK

Excluded trades for the purposes of qualifying for EIS include:

  • Dealing in land, commodities and financial instruments
  • Financial activities such as banking, insurance and financing
  • Providing legal or accountancy services
  • Property development
  • Operating or managing hotels or nursing/care homes

A company can carry on some excluded activities, but these must not form more than 20% of the company’s activities.

RESTRICTIONS ON MONEY RAISED

A company is restricted in terms of the amount of money it can raise through EIS and must comply with the conditions regarding using the money raised through EIS:

  • Companies are not allowed to raise more than £5m in total during any 12 month period through EIS and the other government funded venture capital schemes (Venture Capital Trusts and Seed Enterprise Initiative Scheme)
  • The money raised must be used in a qualifying trade or preparing to carry out a qualifying trade, including research & development
  • The money raised must be spent on a qualifying trade within 2 years of receipt
APPLICATION PROCESS

The EIS is administered by HMRC through the Small Company Enterprise Centre (SCEC). The SCEC makes the decision on whether a company qualifies under the scheme. We have applied to the SCEC for advance approval of our proposed share issue. 

If the SCEC approves our application for EIS it will issue a form EIS2 and sufficient forms EIS3 to give to the investors who have invested over £500 to enable them to claim their tax relief.

The investors claim their tax relief through their annual self-assessment tax return once they have received the Form EIS3. Claims are normally made in the year of investment, but can be made up to 5 years later.

PLEASE NOTE: The availability of any tax relief, including EIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment. Please visit the HMRC website for further information on EIS tax relief: HMRC website EIS guidance - http://www.hmrc.gov.uk/eis/