The Enterprise Investment Scheme, or EIS, provides a range of tax reliefs and incentives for investors, focusing on early-stage, unlisted companies. Investors can select between a broad range of direct share investments or invest in a fund through a professional fund manager.
While the tax advantages are significant and can offer income tax relief as high as 30% of the invested capital, there are also various rules, restrictions and limitations on the amount investors can contribute and the total that businesses can raise.
Let’s look at the EIS allowances, how they apply, and some of the benefits available to investors who remain within the permitted thresholds.
EIS Annual Allowances
Annual allowances cap the amount that any one investor can invest in a qualifying EIS fund or company. Note that the allowance applies to the investor – it doesn’t dictate the number of shares they purchase or how they are split between businesses or funds.
One investor could contribute the full value of their annual allowance into one share purchase, whereas another could utilise their allowance by investing in multiple smaller groups of shares.
The EIS also places maximum allowances on companies. They can raise an upper ceiling of capital financing through the EIS both per year and over their trading lifetime.
Currently, EIS investors have an annual allowance of £1 million, applied for each tax year that runs from 6th April to the following 5th April. Therefore, the maximum income tax relief is normally £300,000, based on 30% tax relief.
However, the government scheme has variable allowances for companies categorised as knowledge-intensive – you can learn more about the criteria to be considered a knowledge-intensive company, or KIC, through our earlier guide.
KIC allowances are double those of other EIS-eligible companies, meaning investors are entitled to invest up to £2 million per tax year, claiming up to £600,000 in income tax relief.
Note that the maximum allowance of £2 million requires the investor to contribute at least £1 million of their total investment in a KIC or number of KICs and KIC-focused funds; they do not need to invest the full £2 million solely in KICs to claim the maximum income tax relief on offer.
It is possible to invest a higher amount, but this will not qualify for the EIS tax treatments, specifically the 30% income tax relief, one of the most significant benefits of the EIS scheme. That said, investments over the annual allowance that are otherwise compliant remain eligible for other reliefs such as capital gains deferral and inheritance tax relief.
There are no defined minimum investment values, but most investors who participate through a fund manager or other experienced EIS investment professional will invest from £10,000 and above.
Companies that qualify for EIS status can raise up to £5 million a year and £12 million as an overall total – the lifetime allowance applies regardless of whether the business raises the maximum annual value for two consecutive years, followed by a £2 million raise, or uses multiple smaller raises over an extended period.
The company limit applies to all capital raised through any government-backed venture capital scheme, including the EIS and:
- The Seed Enterprise Investment Scheme (SEIS)
- Venture Capital Trusts (VCTs)
These initiatives are all considered a form of state aid; hence, the cap on the total amount of financing one business entity can raise, both per year and over the lifetime of the business.
As with many of the EIS allowances and thresholds, these limits are higher for KICs, which can raise up to £10 million in capital investment every year and up to £20 million overall.
EIS Qualification Criteria
Both investors and businesses need to comply with several requirements to be eligible for participation in the EIS. Any failure to meet these conditions will normally mean the company loses EIS status, and shares become ineligible for any tax reliefs or allowances.
Further, a company that loses its EIS status will often mean that investors are no longer eligible for tax reliefs already claimed, which can result in a clawback situation.
At the time of the share issue, an EIS-eligible company must:
- Have been trading for no more than seven years – extended to ten years for KICs.
- Be a permanently established UK business without more than 250 full-time employees or 500 staff members for KICs.
- Have gross assets of no more than £15 million prior to the raise and £16 million once the share issue is complete.
- Not be quoted on any stock exchange or alternative investment market without any plans to become a quoted company.
Further, an EIS-qualifying company must meet a series of conditions both at the point of the share issue and for the subsequent three years. These include being an independent business that isn’t controlled by another organisation, carrying out a qualifying trade, and having a permanent base or facility within the UK.
The funds raised through an EIS-qualifying share issue must be used within 24 months towards growing or developing the business. The company cannot use the capital to buy shares or trading assets in another corporation.
Most trades are permitted, but organisations that provide financial, banking, insurance or lending services, those producing steel and coal or agricultural products, property developers and nursing homes are excluded.
Eligibility Criteria for EIS Investors
Investors must also meet several conditions to be permitted to invest in EIS shares or funds and take full advantage of the tax treatments available. These rules are primarily there to prevent investors who are connected to the business or otherwise involved in running it from investing in their own organisations and claiming generous tax reliefs.
To be eligible to invest up to the maximum annual allowance, an investor cannot be employed by the business or hold a directorship position. They also cannot be related to a connected person – although this requirement excludes siblings.
Investors who are business partners to a connected person, who hold 30% or more of the share capital along with their associates or are already shareholders in the business and own shares that do not qualify for either the SEIS or EIS are also excluded.
While investors can still participate, if they do not meet one of the eligibility conditions, they will not be able to claim tax relief.