The Enterprise Investment Scheme (EIS) provides tax reliefs and other tax-planning incentives to encourage investors to invest capital in small, early-stage, unlisted businesses. However, it is important for any investor to understand how the eligibility requirements, rules and conditions that may apply – both to the company or fund they plan to invest in and to their own circumstances.
Here we run through the EIS rules for investors to be aware of – from minimum share retention periods to your taxpayer status. If in any doubt, we advise contacting EMV Capital for more tailored guidance to ensure you understand whether you comply with all the EIS rules for investors.
Selecting an EIS-Eligible Investment
The first step is picking a company or fund that qualifies for all the tax advantages available through EIS investment.
If you are working with a fund manager, they will conduct due diligence on your behalf. Otherwise, you should look for investment opportunities with advance assurance from HMRC that indicates a strong likelihood the company will be eligible as an EIS business.
EIS Conditions for Investors
One of the core provisions is that to take full advantage of EIS tax reliefs, you cannot have a close connection to the company. For example, a director cannot invest in their own business and claim tax relief.
Employees, associates and other investors with a formal link to the company issuing the shares are unable to claim tax relief. They cannot have been connected to the business at any point within two years of the share issue or the company incorporation date.
Some exceptions apply, where unpaid directors, who do not hold a significant interest of 30% of the voting or share rights, may qualify for EIS tax relief.
There are several more detailed caveats that apply in this situation, but for the most part, it is highly advisable to select EIS investment opportunities without any ambiguity around your connection to the business.
In addition, the investor, and any of their associates, cannot have received a loan from the business within two years of the share issue date. This condition continues to apply after the investment, so the investor cannot receive a loan within three years and retain eligibility for EIS tax relief.
Family or Owner Investment Into EIS Companies
HMRC enforces strict rules where investors wish to inject capital into their own businesses. To be able to claim any EIS tax reliefs, they cannot be connected in any way, including if they, or an associate, is considered:
- A partner in the business or an employee of the partner.
- A direct employee of the company.
- A director of a partnership organisation or subsidiary.
- A shareholder with an entitlement to 30% or more of the ordinary share capital.
The connected parties restriction covers a broad scope, and in most cases, family members cannot invest in EIS shares where they have relatives who are categorised as connected to the company.
Rules exclude spouses, parents, children, civil partners, grandparents and grandchildren from claiming EIS tax reliefs. However, there are no restrictions on other relatives, including siblings and unmarried partners, although caution is advised.
For example, if an investor were to purchase EIS shares and claim the resulting tax reliefs but then become a connected person, they may be exposed to scrutiny by HMRC with the possibility of having relief already claimed subject to repayment.
EIS Share Retention Periods
Both the EIS and Seed Enterprise Investment Scheme (SEIS) require investors to hold their shares for at least three years. Selling or transferring shares before this time will normally mean the tax reliefs are withdrawn, and reliefs already claimed become repayable.
Shares must be ordinary shares, without any preferential capital or dividend rights, and need to be paid in full upfront to qualify for the full range of tax treatments.
If the company were sold within the first three years of the share issue, there is the potential for the shares to be disposed of, in which case the tax reliefs already offered by HMRC will likely be subject to a clawback.
Note that minimum share retention periods differ from the normal lifecycle of an EIS-eligible investment. Most investors expect to retain EIS shares for between five and seven years, and possibly longer, so these investments are best seen as medium to long-term acquisitions.
The nature of early-stage and unlisted businesses means they have the potential to grow rapidly and provide excellent returns in addition to tax reliefs. However, the best returns are normally achieved after five years or more, when a business has reasonable time to become established and gain market share.
EIS Investor UK Taxpayer Status
Most investors select EIS investment both for the capital return potential and the 30% income tax relief – a considerable incentive for higher-income earners and those with substantial income tax liabilities.
Investors do not need to be permanent UK residents to make an investment but must have an income tax liability to offset the relief against – you cannot transfer the relief or use it as part of a dual tax treaty claim to reduce tax obligations in any other jurisdiction.
In addition, investors must make EIS investments purely for commercial purposes. If they are found to be engaged in tax avoidance or tax evasion schemes, they will not receive any tax relief.
Capital must be at risk since the key reason for generous tax treatments is that early-stage, unlisted businesses are at higher failure risk than more established enterprises. If capital is not at risk, the investment is disqualified from tax reliefs, deferrals and exemptions.
Company EIS Investments
Although companies can invest in EIS-eligible businesses, the tax reliefs offered only apply to individual tax liabilities and are unavailable to corporate entities.
That doesn’t necessarily mean there are no reasons to consider EIS investment as a company because a share purchase does not carry any immediate tax liability and can extract surplus capital from a business’s balance sheet to provide other tax planning benefits.
However, investors in a company that purchases EIS shares or fund shares cannot claim tax relief as individuals.
For more information or to find out about our UK EIS investment opportunities, we advise contacting EMV Capital for more tailored guidance to ensure you understand whether you comply with all the EIS rules for investors.