EIS Scheme Explained

Investors can claim up to 30% income tax relief on their investments (up to £1 million per tax year) using the Enterprise Investment Scheme.

What is the EIS scheme?

The Enterprise Investment Scheme (EIS) is a UK government initiative that makes it easier for smaller, higher-risk companies to get investment by providing tax incentives to investors in those startups. The EIS scheme offers a variety of tax benefits to investors who purchase new shares in such companies. It was introduced in 1994 and has since become an important aspect of the UK investment landscape and a large tax benefit for investors.

More than 27,000 startups and businesses have received investment funds under the EIS scheme since its inception, with over £18 billion in cash raised. The majority of the money (56 percent) has gone to enterprises with investors who have received EIS assistance for the first time.

EIS Tax Relief Explained

The EIS scheme provides investors with a variety of benefits and tax incentives as part of their investment, such as:

Deferral of Capital Gains

If you’re an investor with capital gains that exceed your yearly exemption, you can defer them by investing in a company that is eligible for the Enterprise Investment Scheme. Under EIS, gains resulting from your investment are frozen and the tax liability is deferred until the shares are sold. Gains deferred in this manner are lost only when the person investing dies. In addition, there is no cap on the amount of gains that can be deferred.

It's necessary to keep in mind that it's the gain, not the sale proceeds, that should be reinvested. Let’s say you have an asset that costs £50,000 and it was sold for £80,000, the profit would be £30,000. To defer the gain, the £30,000 would have to be re-invested in EIS-qualifying shares (assuming you’ve already gone over your yearly capital gains threshold).

Gains can be deferred for up to three years after EIS eligible shares are issued, or one year before the EIS shares are issued. The image below explains the deferral window for Capital Gains.

Income Tax Relief

EIS investments are eligible for up to 30% income tax relief, which incentivizes investors to take on some of the risk that comes with investing in small businesses. In a single tax year, investors can claim relief on up to £1 million in EIS eligible investments, which equates to £300,000 in income tax relief. EIS allowances are granted on an individual basis, which means that a married couple could invest up to £2 million each tax year and benefit from income tax relief.

The tax credit will be withdrawn if the shares are not retained for at least three years from the date of issue. People who are connected to the firm or who have a partner or associate who is related to the company are not eligible for income tax relief on their shares.

Loss Relief

Loss relief allows an investor to offset a loss made on an investment in an EIS company. Investors can claim tax relief against their income tax or capital gains tax bill. Loss relief can be claimed in the tax year in which the loss is realized or the tax year after that.

To qualify for loss relief, the value of an investment at the time of sale must be less than the 'net cost'. The net cost is the amount invested minus any income tax relief you may have previously claimed. Let’s say you invested £20,000 in an EIS-qualifying investment and claimed £8,000 in income tax relief (which is equivalent to 40% of your investment), your net cost would be £12,000.

Inheritance tax relief

Business Property Relief (BPR) applies to EIS shares. As long as they've been held for at least two years at the time of death, they can be given to beneficiaries free of inheritance tax.

Growth that is tax-free

Any growth in value from an investment is tax-free when investors sell EIS shares. This is a huge benefit because small and early-stage businesses have the ability to build up and expand enormously.

The tax benefits offered by the EIS scheme are significant. However, we suggest making your investment decision based on the merits of the investment rather than the tax benefits alone.

F6S can help with your EIS tax relief claim

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Key Benefits of EIS tax relief

Companies that qualify for the EIS scheme

Companies that qualify for the EIS relief come from a wide range of sectors and industries. To see if your company qualifies, HMRC has established a set of criteria that need to be met:

How to claim EIS tax relief?

You need to submit the following details to HMRC in order to claim Enterprise Investment Scheme tax relief:
  • The names of the companies in which you have made investments.
  • The exact amount on which you're claiming relief (for the respective year).
  • The exact date on which the shares were first issued to you.
  • The name of the HM Revenue and the Customs office that authorised the certificate's issuance, as well as their reference (as shown in the certificate).
  • If you have invested more than £1 million in shares that are eligible for relief, indicate HMRC how you wish the relief to be attributed.
The aforementioned information can be found on the EIS3 certificates that you will get from the company or fund after your investment. Because these certificates must be delivered and processed by HMRC based on information provided by the company, they are normally issued three to four months following the closure of the company's investment round.

Note: If you make an investment in EIS-qualifying shares but you haven't received a form EIS3 or EIS5, you won't be able to claim relief. If you have received the form after you’ve sent your tax return, you have to complete the claim form inside EIS3 or EIS5 and send it to HMRC.

What is EIS Advance Assurance?

Companies can use EIS Advance Assurance to get a preliminary indication from HMRC on whether they are eligible to apply for tax relief for their investors. Advance Assurance was introduced to provide investors with peace of mind that their investments would be eligible based on the information they were given.

Who can submit the EIS Advance Assurance application?

You can apply if you are:

  • The director of the company.
  • The company secretary.
  • A trustee (if it is a charitable trust).

Information required to apply for EIS Advance Assurance:

  • Financial forecasts and business plan.
  • If available, a copy of the most recent accounts.
  • The amount of money you hope to raise.
  • Which businesses will benefit from the investments?
  • List of the amounts, dates, and investors  under which you've previously received  investments.
  • Details on all trading and activities to be undertaken, as well as the amount of money you anticipate to spend on each.
  • A current copy of the memorandum and articles of association, as well as information on any changes you want to make.
  • Any materials you use to present your proposal to potential investors, including the most recent draft.

What are the risks associated with the EIS scheme?

Along with the advantages, it's critical to comprehend the risks associated with investing in EIS-qualifying shares. Investing in smaller EIS-qualifying enterprises at an early stage is dangerous and should only be undertaken by investors who are willing to take big risks.

Here are some important things to consider before investing in EIS-qualifying shares:

Loss of Capital

It is likely that investments could drop in value, possibly losing some or all of your initial investment. This puts the capital of the investors at risk.

Limited number of exit options

EIS shares are unquoted. This means the company cannot be listed on the London Stock Exchange or any other recognised stock exchange. The Alternative Investment Market (AIM) is not treated as a recognised market under EIS rules. This makes the shares harder to sell.

EIS tax reliefs need a three-year holding period from the date of investment in each company. However, investors should expect to keep their money for a long time, possibly ten years or more.

The company has to remain EIS-qualified

EIS tax reliefs and tax allowances are based on current legislation. The tax rules, as well as HMRC's interpretation of them, may evolve in the future. There's no certainty that the businesses in which you've invested will remain EIS-qualifying. You may be requested to refund the income tax benefit you received if the company loses its EIS-qualifying status within three years of your investment.

F6S can help with your EIS tax relief claim

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How much can I invest in the EIS scheme?

As an investor, you can invest up to £1 million per tax year in the EIS scheme. You can invest up to £2 million provided that anything above £1 million are 'knowledge intensive' investments.

Is it possible to hold EIS shares in an ISA?

No, you are not able to hold shares in an ISA according to the Enterprise Investment Scheme (EIS) rules.

Can you transfer your EIS shares to your partner?

Yes, you can transfer EIS shares to your partner if you are married. There is no tax to be paid if you give shares to your spouse. The spouse will be subject to capital gains tax when they sell the shares in the future.

Is EIS tax relief still available if the company in which I originally invested is acquired by another company?

The EIS relief can be maintained if the new company buys 100% of the company's stocks. There are, however, some requirements that must be met:

  • Prior to acquiring the subsidiary, the new firm solely issued subscriber shares.
  • The shares issued must be of the same class and have the same rights as the subsidiary's shares.
  • The shares that are issued must be in the same proportion as those that were previously held by the subsidiary.
  • Either the subsidiary or the parent business must file a clearance application with HMRC, stating that the arrangements are primarily for commercial purposes.
  • The new shares are treated in the same way that the previous shares were.
What is EIS carry back?

EIS investments come with a “carry back” option. You can elect to treat all or part of your EIS shares purchased in one tax year as if they were purchased in the prior tax year.

Do EIS pay dividends?

EIS has the potential for a higher, but longer-term return on investment, but it does not pay dividends on a regular basis.