Adam Chick
Associate Director, Buzzacott
The Enterprise Investment Scheme (EIS) supports UK economic growth by encouraging investment in startups and SMEs through tax reliefs, boosting innovation and business expansion.
Young startups with little to no trading history face high risks, making traditional financing difficult. Private investors often demand excessive equity, making investment costly. The EIS mitigates this risk with generous tax reliefs, encouraging investment. Economically, it drives innovation, attracts businesses to the UK and fuels growth and job creation.
How does EIS work?
There are several conditions a company must meet to qualify for the scheme; none are too onerous, and HMRC has an advance assurance process to provide comfort that a company qualifies, prior to investment.
Primarily, the company needs to have been trading for less than seven years, not within an excluded activity (such as finance or property development) and have long-term plans to grow and develop the business. To ensure the relief is targeted correctly at companies with long-term growth in mind, the shares must be held, and the company conditions maintained for a three-year period.
If shares are held and remain qualifying, investors can benefit from a raft of tax reliefs. The 30% Income Tax relief on investments up to £1 million a year (£2 million for knowledge-intensive companies) immediately reduces the upfront investment.
Primarily, the company needs
to have been trading for
less than seven years.
CGT deferral and protection
There’s also the opportunity to defer Capital Gains Tax (CGT) on a realised gain by reinvesting that money into EIS shares. The gain comes back into charge when the EIS shares are sold, but nothing is stopping you from reinvesting the gain again and again. Finally, further relief is also available at an exit or disposal.
If the investment does well, any gain is exempt from CGT, protecting investments from the increased CGT rate and any further CGT increases.
Importantly, given the high-risk nature of EIS investments, EIS offers benefits should the shares fall to zero or be sold for less than the original investment. EIS loss relief allows the investor to offset that net loss (investment minus tax relief claimed) against either their income tax or CGT bill, whichever is preferable.
Are EIS investments right for you?
Despite all these benefits, EIS remains an underutilised scheme, perhaps due to its inherently high-risk nature. While you cannot invest in your own company, you can invest in friend’s and (some) family companies. If you are a sophisticated investor, consider talking to your financial advisor to see if EIS investments are right for you.
