The Enterprise Investment Scheme (EIS) is an accessible, diverse investment opportunity created to generate capital investment into early-stage and unlisted businesses, offering investors tax reliefs and exemptions as an incentive – but who is eligible to invest?
Although there are no blanket eligibility criteria (other than being a UK taxpayer) applied to investors, companies must apply for EIS status and be formally approved by HMRC before they can issue EIS investment certificates.
Investment Criteria Applicable to EIS Investors
The primary focus of the EIS scheme is to attract capital investment in smaller, unlisted British companies that meet the government eligibility criteria to qualify for EIS.
Because of the variable risk linked with investment in unlisted company shares, the following description outlines a typical EIS investor profile:
- High net worth individuals with sufficient wealth or investment expertise to make speculative investments in small businesses with positive potential for growth.
- Investors who are comfortable backing early-stage or smaller businesses.
- Long-term investment approaches, with the highest returns achieved over extended investment periods as the company scales.
- Those interested in supporting developing companies with an astute knowledge of the indicators that may make one EIS investment attractive over another.
While any investor could choose to invest in EIS shares, the reliefs and returns available may be minimal on lower investment values.
It is also important to recognise that EIS investments are intended as medium to long-term investments and must be held for at least three years to qualify for tax reliefs without an easily ascertained resale value, given that shares are unquoted.
Reasons to Invest Through EIS
One of the main reasons a company aims to raise capital through the EIS scheme is because it forecasts rapid or considerable growth, using the investment to engage in new opportunities or markets, increase capacity, or invest in other target trading areas.
Tax reliefs mitigate some of the risks linked with investment in an early-stage company, including loss relief which reduces the effective loss suffered if the business fails or the shares become devalued. You can read more about (EIS tax relief here (link to other blog).
However, tax treatments can vary depending on the investor’s other financial circumstances and are subject to limitations such as a maximum investment cap of £1 million per year in qualifying EIS companies or £2 million for companies categorised as Knowledge Intensive. (Read more about EIS benefits here – link to first blog).
Other investment considerations include the following:
- Companies applying for EIS status are normally innovative and at a relatively early stage and are more likely to be positioned to solve problems, use innovation and address changing consumer demands with agility.
- EIS shares allow investors to diversify by adding variable investments to their portfolios that can act as a hedge or diversification exercise against other investment assets.
- As part of a long-term investment strategy, investors can combine EIS shares with other assets, including pension schemes, ISAs and Venture Capital Trust investments.
The tax planning advantages may be most favourable to seasoned investors with the ability to accept the higher risk while offsetting other tax liabilities or reducing their overall exposure to taxes, such as capital gains, by having the option to reinvest profits in EIS shares.
What about the Risks of EIS Investment?
Every investment includes a balance of risk vs reward, and it is important to consider your investment strategy, objectives, time horizon, and anticipated returns. The nature of EIS criteria means that qualifying companies can be difficult to assess and may have unpredictable futures.
Therefore, EIS investment can be an opportunity to invest in the UK economy, support businesses in sectors of interest, or invest in long-term growth. Still, the inherently high risk cannot be ignored.
As with almost all investments, capital is at risk. Investments in EIS shares can fall in value, including to zero value. Although investors may not have recourse to recover their capital, entitlement to tax reliefs and loss relief remains.
It is also advisable to consider your personal tax position to ensure tax reliefs and allowances remain valid and are consistent with other tax planning approaches. A company with advance approval may later find that its EIS status has not been validated, and investors will not be able to claim tax reliefs.
If a company with EIS status loses its eligibility within the first three years, an investor could potentially be instructed to repay the income tax relief they have claimed in the interim.
What to Consider Before Investing in EIS Shares
Companies eligible for EIS are unquoted, and exit strategies and resale values are complex since a share that is not listed on a stock exchange can be more difficult to assess or dispose of. It may not be possible to sell EIS shares quickly and depending on the company and its performance, investors can often expect to wait several years before their shares yield a high return.
Investors must also be prepared to retain their EIS shares for at least three years from the investment date, although with an average holding period of at least ten years.
A risk analysis is important and ensures investors understand and acknowledge the risk exposure associated with any EIS investment opportunities, including having capital at risk and the potential for shares to fall to a nil value.
Tax reliefs rely on the company maintaining qualifying status for EIS for the minimum three-year period. Any issues or possible reasons the business may lose eligibility should be assessed, as this could result in the removal of tax reliefs or repayment demands for reliefs already claimed.
Investing in EIS Shares Through a Fund
Investors can opt to add EIS shares to their portfolios either directly or through an EIS fund such as our Evergreen fund, but care should be taken in either scenario. Direct investments are solely the investor’s responsibility, and they must ensure they have conducted sufficient research, analysis and due diligence checks to be aware of risks and mitigating factors.
Likewise, when investing through a fund manager, investors should assess the expertise and track record of their selected manager before proceeding, while noting that previous performance is not a guarantee of any future return.
Portfolio and fund management services carry transactional charges, management fees and administrative costs, so if you are considering an EIS investment through a fund or investment adviser, you should be equipped with full details of the anticipated expenses.
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.