The UK government introduced the Enterprise Investment Scheme (EIS) in 1994 to incentivise investors to support early-stage and smaller, unlisted companies trying to raise capital.
Eligible companies fall beneath maximum thresholds in terms of revenue, workforce and asset values and provide investors with a share certificate to evidence their EIS status and the investor’s access to various tax reliefs.
But what are the benefits of EIS? EIS investment provides several benefits, including the potential to generate competitive returns from high-growth business investment opportunities alongside reliefs and tax exemptions. In this article, we’ve compiled a list of 10 EIS benefits for investors.
10 EIS benefits for investors
1. Access to Potentially High Investment Returns
Tax reliefs offset the risk of investing in a higher-risk company. Still, investing in small, growing businesses may provide excellent returns, where investors can buy into the shareholding at an early stage and possibly achieve returns far beyond market or index averages.
2. Income Tax Relief of Up to 30%
Although you must retain an EIS investment for at least three years, you can apply for 30% income tax relief against invested capital of up to £1 million immediately after receiving your EIS documentation.
The effective outcome for a high-net-worth investor is a tax reduction of £300,000 per year when investing the maximum value or tax relief of £30,000 per year for every £100,000 invested. If you dispose of EIS shares before the three-year period, any income tax relief already claimed will be void and repayable.
3. Exemption from Capital Gains Tax
Gains achieved on EIS investments are exempt from capital gains tax, including the profit made when selling an EIS share after the three-year period. Investors must have previously claimed income tax relief to be eligible for the capital gains tax exemption.
4. Investment Diversification
EIS attracts businesses from across sectors, giving investors options to diversify and reduce risks by selecting companies they believe to have strong growth potential, are operating in untapped industries, or have a clear competitive edge.
As a diversification exercise, investors can purchase as many shares as they wish within the annual threshold and select alternative business structures, industries and investments to balance their venture capital portfolio.
5. Low Barriers to Entry
Unlike conventional stock exchanges, any UK taxpayer can invest in EIS shares, either directly through the company raise or via an EIS investment fund or platform. Shares begin at values as low as £10, and although smaller investments will be less valuable in terms of tax relief, EIS is not exclusive solely to investors with a large amount of capital.
Any taxpayer is eligible to invest in EIS shares and claim tax reliefs and exemptions, including employees who do not normally submit self-assessment tax returns. In this case, the forms included within your EIS certification can be used to submit the relevant details to HMRC.
6. Loss Relief
Loss relief reduces the impact of a loss, which is a potential outcome when investing in a young and unlisted company. The loss relief means investors can claim a reduction in their tax liabilities if an EIS investment fails through either their income or capital gains tax obligations.
An EIS investment of £100,000 has an effective cost of £70,000 post-income tax relief. If that investment value drops by 50%, you can claim loss relief of £31,500 to reduce the effective loss to 11%.
If the same investment were to become zero-valued, the effective loss would be £38,500, or 38.5% of the originally invested capital, providing a considerable degree of loss mitigation.
7. Investment in Positive Social Change
The accessible nature of the EIS scheme means that there are diverse investment opportunities, with investors able to inject capital into sectors, companies or business spaces that align with their interests.
Investment in early-stage companies can produce good returns but also contribute to social change, inclusion, innovation and economic development. EIS funds stimulate the growth of the UK SME’s sector by focusing funding on knowledge-intensive businesses of the future. According to recent HMRC figures, from 2020 to 2021, 3,755 companies raised a total of £1,658 million of funds under the EIS scheme.
8. Capital Gains Tax Deferrals
As well as the ability to claim capital gains exemption on all EIS gains, investors can also offset other capital gains tax liabilities arising from unrelated activities by reinvesting the gain into an EIS-approved company.
The exemption remains valid for the duration of the investment period without a threshold value or time limitation. If you dispose of the reinvestment, the capital gains tax liability becomes released and payable at the relevant bands, any other allowances notwithstanding.
9. Inheritance Tax Exemption
If an investor passes away and leaves EIS shares to a beneficiary in their will, the value of the shareholding is exempt from inheritance tax, provided the original owner retained the shares for at least two years beforehand.
Investors can leave shares to their heirs without any inheritance tax liabilities, regardless of the value of the rest of their estate.
10. Access to Alternative Investments
The alternative investment market is increasingly attractive to investors looking for new ways to grow their wealth, invest in areas of interest, or hedge risks linked to stock market volatility and other economic trends and sideways movements.
Although investing in EIS Funds is generally considered a higher risk and thus entitled to tax reliefs and allowances, astute investment provides access to a broad scope of potential businesses and sectors, which may be less exposed to inflationary uncertainty.
Claiming EIS Tax Reliefs
Taxpayers with a valid EIS investment and certificate can claim tax reliefs through their self-assessment tax return or by submitting the claim documentation provided with their EIS certificate.
They will need to have the relevant references and information available, including the details of the company in which they have invested and the HMRC office that approved the company’s application for EIS status.
Details of the EIS investment should be entered into the Other Tax Reliefs section, showing the amount subscribed, which HMRC will use to calculate the available tax reliefs up to the investment cap of £1 million. Note that investors can choose to invest more, but they will not be entitled to further tax relief.
An exception applies to companies categorised as Knowledge Intensive, operating primarily for research and development purposes. When approved as an EIS-eligible business, these companies offer a larger investment opportunity, up to £2 million annually.
Further guidance on claiming tax relief against EIS investments is available from HMRC.
Read our EIS Guides
- What is EIS Deferral Relief?
- Tax efficient investing in the UK
- EIS rules for investors explained
- What is EIS tax relief?
- What EIS advanced assurance?
Disclaimer: The information and opinions within this article are for general information purposes only, are not intended to provide an exhaustive summary of all relevant issues or to constitute investment, tax, legal, or other professional advice. They should not be relied on for, or treated as, a substitute for specific advice relevant to particular circumstances and you should seek your own investment, tax, legal or other advice as appropriate. In not doing so you risk making commitments to products and/or strategies that may not be suitable to your needs. Neither the writer nor EMV Capital Limited accept any responsibility for any errors, omissions or misleading statements in this article or for any loss which may arise from reliance on materials contained on this article.