Enterprise Investment Scheme (EIS)

About EIS: The Enterprise Investment Scheme (EIS) is a government initiative, which was set up in 1994, designed to encourage investment into small unquoted companies.

The Enterprise Investment Scheme exists to incentivise private investors to risk capital by investing in young, growing, small businesses which may otherwise struggle to raise equity finance but exhibit significant investment return potential. Those incentives come in the form of income, capital gains and inheritance tax reliefs which combine to make EIS one of the most tax advantaged, government backed investments available

Mark Brownridge, Director General, Enterprise Investment Scheme Association (EISA)

EIS Tax Reliefs Available

Investors can, depending on their individual circumstances, enjoy some or all of the tax benefits available under the Enterprise Investment Scheme. The following is a general summary of the main current tax advantages that may be available to an Investor under the Enterprise Investment Scheme in respect of an investment made in an Investee Company during the tax year.

  • Investors may claim up to 30% income tax relief, up to a maximum individual investment of £2m per tax year, subject to at least £1m being invested in Knowledge Intensive Companies.
  • CAPITAL GAINS TAX DEFERRAL of unlimited gains on the sale of any assets if an EIS investment made within one year before or three years after the date of the disposal of the assets which give rise to a gain.
  • NO CAPITAL GAINS TAX on the disposal of shares which have been held for at least three years in EIS Qualifying Companies.
  • 100% INHERITANCE TAX EXEMPTION through the availability of Business Relief may be available after EIS qualifying investment has been held for at least two years. 
  • LOSS RELIEF providing total tax relief of up to 61.5% for a 45% tax payer.

The above tax advantages can only be claimed when the investors funds have been deployed into a company, rather than when an investor makes an initial subscription. There is no limit to the amount of gains that can be deferred for CGT purposes.

The above does not constitute tax advice to any person: it is recommended that investors take independent, tax, legal and financial advice from a qualified professional adviser before considering an investment

Please note that tax benefits depend on personal circumstances, are not guaranteed, and rely on UK Tax Legislation which may change in the future. Investments in unquoted companies carries high risks and investors could lose all funds invested. Investors should not invest if capital is required in the near term. No established market exists for the trading of shares in private companies, making it difficult to sell shares.

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EIS investment opportunities

Example EIS Investment

Investee Company

x2 in value

Sum invested £50,000

Income Tax Relief £15,000

After holding shares for 3-5 years, you sell them for £100,000, owing nothing in capital gains tax.

Total gain to investor: £65,000 (£50,000 from the sales of shares, plus £15,000 from Income Tax Relief)

Total loss/gain

+£65,000

Investee Company

Same Value

Sum invested £50,000

Income Tax Relief £15,000

After holding shares for 3-5 years, you sell them for £50,000, the price you paid.

Total gain to investor: £15,000 (£50,000 from the initial investment is returned, plus £15,000 from the Income Tax Relief)

Total loss/gain

+£15,000

Investee Company

Goes out of business

Sum invested £50,000

Income Tax Relief £15,000

After the company goes out of business your shares are worth £0.

The investor receives loss relief from the government, equal to your capital at risk. In this example the £50,000 invested - £15,000 in Income Tax Relief, multiplied by the percentage bracket you belong to (£50,000 - £15,000 = £35,000). At a 45% tax bracket, the loss relief will be £15,750 (45% of £35,000). So for £50,000 invested, your real loss is £35,000 - £15,750 = £19,250

Total loss/gain

-£19,250

 

The examples in this section are set out for illustrative purposes only and include tax reliefs within the forecast returns. They are not, and should not be construed as, forecasts or projections of likely performance. Past performance is not a guide to the future performance of an investment. The EIS tax reliefs are not guaranteed, are dependent on personal circumstances and may be subject to change in future. They are also dependent on the investee company qualifying for EIS relief and maintaining its EIS status for the requisite 3 years.