Eligible Enterprise Investment Scheme (EIS) companies or funds offer considerable advantages for tax planning, not least up to 30% income tax relief which can be an attractive feature for higher or additional rate taxpayers with significant liabilities. However, the maximum EIS investment you can make while taking advantage of all the available reliefs depends on the nature of the EIS fund or company.
Theoretically, investors can purchase any value of EIS shares or fund shares, although investments above the maximum threshold qualifying for tax reliefs will lose a great deal of their efficiency.
EIS Limits Based on Fund Types
The standard annual cap for EIS investments is £1 million – investors can claim all available tax reliefs and allowances, depending on their circumstances, against investments up to this value per year.
Knowledge-intensive companies (KICs) are treated differently and have a more generous £2 million annual investment limit, as well as other contrasts, since:
- KICs can raise up to £10 million through EIS investment a year – double the threshold for other EIS companies and funds.
- These companies, or KIC-focused funds, have a longer timeframe; a KIC can welcome financing within ten years of the company’s first sale. In contrast, any other EIS company must raise investment within seven years.
- Qualification criteria are more lenient since an EIS-eligible company can have up to 250 full-time members of staff, compared to 500 for a KIC.
From an investor viewpoint, they can claim all tax treatments offered through the EIS against investments up to £2 million, provided at least £1 million has been invested in KIC shares or fund shares.
Interested in investing in EIS? The EMV Capital Evergreen EIS Fund is a discretionary portfolio which makes tax-efficient investments into exciting EIS Qualifying Companies. Find out more here.
Knowledge Intensive EIS Companies Explained
To be verified as a KIC, a business needs to be engaged in specific activities which are considered ‘knowledge-intensive’. For example, they could be in the process of developing intellectual property at the time of the share issue, which is intended to be the primary focus of the company within a decade.
Alternatively, a KIC can apply for this status if at least 20% of the workforce is involved in research and development and they employ highly skilled researchers with master’s degrees or equivalent professional credentials.
In addition, to be considered a KIC, the company must spend at least 10% of its operating costs over a three-year period on innovation or research and development or at least 15% of operating expenses in one of those three years.
Various other conditions apply based on the company’s age, annual turnover and other criteria. Still, a KIC is fundamentally a business focused on innovation rather than a trading company that produces goods or services.
EIS Limits for EIS Investors
Aside from the higher allowances for KIC investments, EIS investors need to be aware of the annual investment limit since exceeding this cap will mean that a proportion of their invested funds do not qualify for favourable tax treatment.
Income tax relief is one of the motivating factors, but the 30% relief will only apply on investments up to £1 million (or £2 million for KIC investments) – meaning the income tax relief available is fixed at up to £300,000 (or £600,000) per year.
Other tax treatments, such as inheritance tax relief, are not necessarily affected, but calculating your income tax obligations is useful since this can inform the timings of investments, where:
- EIS income tax relief can be claimed in the year of the investment or carried back to the previous year.
- Income tax relief that is not used because your liabilities are lower than the tax relief available cannot be carried forward.
- You can split your treatment of one investment up to £1 million, carrying back some of the tax relief and applying the remainder in this tax year.
EIS tax reliefs differ from other venture capital schemes, such as Venture Capital Trust investments, where the tax relief is only available in the year of share acquisition.
Annual investment caps are also variable depending on the venture capital scheme or funds you select – the annual maximum you can claim relief on for Seed Enterprise Investment Scheme (SEIS) investments is £200,000. However, the relief is higher at 50%.
Venture Capital Trust investments have an annual £200,000 investment cap, and Social Investment Tax Relief (SITR) investments have a limit of £1 million.
Other EIS Investment Requirements to Claim Tax Relief
Alongside the yearly caps on the investment values you can claim relief against, investors should note other requirements and rules that affect their eligibility for tax reliefs:
- EIS shares or fund shares must be retained for at least three years. Investors who sell or transfer their EIS shares before this time may waive their right to tax relief or be subject to reduced tax relief – this will be repayable if already claimed.
- Shares and fund shares must be paid for in full and upfront. Qualifying shares must also be ordinary shares, without any call or put options placed over the shares in the first three years.
- The investor cannot receive payments or other returns from the company or fund, or anybody linked to the company or fund, for the first three years, based on three years from the share issue date. For example, if the company or fund redeemed or repurchased investor share capital, the investor would sacrifice their tax reliefs.
- Qualifying EIS investments may be tax efficient but cannot be part of a tax avoidance scheme. Find out more about tax-efficient investing in the UK here.
Further, investors cannot claim tax relief if they do not have a corresponding income tax liability to apply the relief against. If an investor had a tax obligation of £50,000 this year and in the previous tax year and made an EIS investment with an arising tax relief of £150,000, they could carry back one-third of the relief and apply another third in the current year.
Read more EIS examples here.
However, the £50,000 remaining available tax relief cannot be carried forward or brought back past one year before the investment, so it would be lost.
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.