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The Enterprise Investment Scheme was designed by the Government in 1994 to provide investors with an incentive to invest in smaller unquoted companies. Companies that qualify for EIS investment are usually small, privately-owned companies listed on AIM (Alternative Investment Market) that have gross assets of less than £15 million and less than 250 employees.

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

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 the 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Tax payable on the disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.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 lossless 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 is The EIS?

The Enterprise Investment Scheme was designed by the Government in 1994 to provide investors with an incentive to invest in smaller unquoted companies. Companies that qualify for EIS investment are usually small, privately-owned companies listed on AIM (Alternative Investment Market) that have gross assets of less than £15 million and less than 250 employees.

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.

Working Example

Who Can Qualify For EIS?

There is a vast range of companies that qualify for the EIS including many industries and sectors. Although the rules are specific, a company just essentially needs to carry on a trade with a view to making a profit to qualify. Your company is eligible to use the scheme if:

• It has a permanent establishment in the UK
• It is not trading on a recognised stock exchange
• It does not control another company other than qualifying subsidiaries
• It is not controlled by another company
• It doesn’t expect to close after completing a project or series of projects
• Fewer than 7 years have passed since your company's first commercial site

Some companies and sectors, such as those that deal in land, commodities and shares, are excluded as well as companies that have significant asset backing or contractual revenue streams.

What Money Raised by EIS Investments Can Be Used For

The government has fairly strict rules on what EIS investments can be used for and must be used for ‘qualifying business activity. This could include any of the following:

• A qualifying trade which includes coal or steel production, leasing activities, property development, legal services, exporting electricity, banking, insurance or financing services and much more
• Preparing to carry out a qualifying trade which should start within 2 years of investment
• Research and development that’s expected to lead to a qualifying trade

Additional to this, the EIS investments raised must also:

• Be spent within 2 years of the investment date (or trading date if started trading after the investment)
• Not be used to buy another business
• Be used to grow or develop your business
• Pose a risk of loss to capital for the investor

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 to help companies to raise money to assist with business growth. This is achieved by offering tax relief 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 notes, don’t hesitate to get in touch with our team at CSS Partners.

Working Example 2

How Can I Raise an EIS Investment?

If you want to reward your existing investors with EIS benefits, you need to apply for the Small Companies Enterprise Centre (SCEC) which runs the scheme. HMRC will then decide whether or not you qualify for the scheme and will let you know if you can proceed with your application.

Once you can go ahead with your application, you must fill out the EIS1 form and send it to the HMRC who will make a final decision on your application and let you know whether your investors qualify for EIS relief.

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 number 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 the potential to lead to the qualifying trade and the qualifying trade itself.

Is investing in 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.

How do I invest in an EIS qualifying company?

There are a number of ways that you can get EIS investments, such as:

• Putting your money into single companies by picking them yourself
• Invest in a portfolio run by a fund manager who will typically pick around 5 to 10 EIS qualifying companies that are best for you
• Signing up to a platform or with a broker to help you find EIS investments
• Crowdfunding sites that offer access to lots of early-stage company deals

How much money can I invest in Enterprise Investment Schemes?

You can invest up to £2 million a year and benefit from tax relief. Most portfolios will as for a minimum investment of £10,000 to £25,000. However, if this is too much for you currently, crowdfunding sites allow you to invest as little as £100.

When you make an EIS investment, it’s important you inform the taxman so that you can receive an EIS3 certificate for each company you invest in. These then need to be submitted with your tax return. If you don’t do a tax return, you can submit your EIS3 directly to HMRC which will then either change your PAYE code or make an adjustment on your self-assessment account that’s due.

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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.
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