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The Enterprise Investment Scheme was designed by the Government to provide investors with an incentive to invest in smaller unquoted companies.

The tax benefits of EIS are only available when new shares are bought. If the existing shares of an EIS-eligible company are bought on the secondary market then none of the tax breaks are available via EIS.

EIS Shares

EIS shares, otherwise known as The Enterprise Investment Scheme, was designed originally by the Government to provide investors with an incentive to invest in smaller unquoted companies. The tax benefits of EIS shares are available when new shares are bought only, so if the existing shares of an EIS-eligible company are bought on the secondary market, then none of the tax breaks are available via EIS shares.

At present, there are five EIS shares benefits:

  • Income tax relief
    In the overall investment, an individual can reduce their income tax liability by 30% of the amount invested. There is no longer a minimum investment level and the maximum per investor is £1,000,000 per annum. Individuals who have not used their EIS shares entitlement in the previous tax year can treat all or part of the cost of the investments as subscribed in that year; up to maximum annual investment limit for the applicable year.
  • Capital Gains Tax Deferral Relief
    Tax on gains realised on a different asset can be deferred where the EIS investment is less than 12 months before or 36 months after the disposal of the asset. There is no minimum period for which the EIS shares must be held. The deferred capital gain is brought back into charge whenever the EIS shares are disposed of (or are deemed to have been disposed of under EIS legislation). Deferral relief is unlimited.
  • Capital Gains Tax Exemption
    No Capital Gains Tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.
  • Capital Protection
    If EIS shares are disposed of at any time at a loss, such loss less any income tax relief previously given, can be offset against the investor’s income in the year of disposal or the previous year. For gains offset against income tax, the net effect is to offer investment protection of 61.5p in the £1 for a 45% taxpayer. Alternatively, the losses can be offset against Capital Gains Tax at the prevailing rate of up to 28%.
  • Inheritance Tax Exemption – EIS shares Investments are generally exempt from Inheritance Tax after two years of holding the investment.

EIS Tax Breaks EIS Working Examples

What Can EIS Shares Be Used For?

The raised money must be used for a qualifying business activity, including:

  • Preparing to conduct a qualifying trade (within 2 years of investment)
  • A qualifying trade
  • Development and research that is expected to result in qualifying trade

How Do EIS Shares Work?

EIS shares are designed in order to help companies to raise money to assist with business growth. This is achieved by offering tax reliefs to individual investors that buy shares in companies. Under the Enterprise Investment Scheme, up to £5 million can be raised, as well as a maximum of £12 million in the lifetime of the company, including the amount received from other venture capital investment schemes. For this, the company must have received investment within 7 years of its first commercial sale under a venture capital scheme.

For EIS shares, the rules of the scheme must be followed so that the investors can claim and keep the EIS tax reliefs involving their shares.  For companies who have been trading for less than two years, a similar scheme is in place, known as the SEIS scheme (Seed Enterprise Investment Scheme).

If you would like to find out more information about alternative investment capital and the information you will need for EIS shares and convertible loan note, don’t hesitate to get in touch with our team at CSS Partners.

Frequently Asked Questions

What is an EIS scheme?

Known as an Enterprise Investment Scheme (EIS), the EIS scheme was introduced by the Government to increase the amount of investments that are made into smaller companies across the UK. The investor will gain significant reductions in tax once shares are bought.

What is the money from EIS Shares typically used for?

All funds must be put towards qualifying business activity. This can include preparation research and development which has potential to lead into the qualifying trade and the qualifying trade itself.

Is investing into an EIS scheme risky?

As with any form of investment, you should familiarise yourself with the risks associated before going ahead. Making an investment into a small business comes with a level of risk as there is no guarantee of making back the investment. The lack of past data to work with and operating in a new market leaves a lot of uncertainty so research should be carried out beforehand.

How much tax can I save through an EIS scheme?

There are a lot of tax benefits when buying shares, offering benefits of different levels. You can save 30% of income tax on the amount you invested with no minimum investment, are exempt from capital gains tax and are generally exempt from inheritance tax after two years of holding the investment. EIS qualifying investments need to be held for a minimum of three years.

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  • The level of tax treatment depends on your individual circumstance. Tax breaks exist under current legislation and are subject to change. EIS/SEIS approval cannot always be guaranteed, or on the assumption that EIS/SEIS relief is actually obtained, there is no certainty that companies will continue to qualify for such relief in the future. Investment in private companies carries a high risk: it is highly speculative and there is no recognised market for these shares. Investors in private companies must have no need for liquidity and must be able to withstand a total loss of investment. Past performance is not an indication of future performance and investments may go down as well as up. Private equity investment and certain investments offered by CSS Partners are not suitable for all investors.
    This document has been prepared and issued by CSS Partners LLP (“CSS Partners”) and has been approved for publication in the United Kingdom by Charles Street Securities Europe LLP (CSS) who are authorised and regulated by the Financial Conduct Authority in the UK. CSS Partners is an appointed representative of Charles Street Securities Europe LLP. This document is intended only to give background information on the subject of the report and is a marketing communication as contemplated by the FCA rules.
    In the preparation of this CSS Partners has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This document is published for information purposes and is not to be construed as a solicitation or an offer to buy and sell any securities or related financial instruments. This document should not be regarded by recipients as a substitute for the exercise of their own judgement.
    Although all information contained in this document has been compiled from sources believed to be reliable, we do not guarantee its accuracy or completeness. The report is selective and does not purport to provide a complete survey of the subject.
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