Enterprise Investment Scheme – Tax Relief

This guide is focused on the Enterprise Investment Scheme (EIS) that gives individuals the ability to invest in start up companies with the ability to claim tax relief on gains or losses arising from these investments subject to strict criteria set by HMRC.

Private investment entails providing funds to businesses in exchange for shares, that can then utilized to foster business growth through various means such as acquiring new equipment, expanding staff, or launching new products. The government facilitates private investment through the Enterprise Investment Scheme (EIS), offering significant tax relief to investors who invest in eligible companies.

The underlying principle of the scheme is to incentivize investors to back small UK businesses. These tax relief options help mitigate the risks associated with supporting start-up enterprises, which may encounter difficulties or fail despite receiving investment.

Reasons to invest in EIS-qualifying businesses:

EIS offers investors the chance to support small, growing businesses with potential for significant value appreciation. To offset the inherent risks, HM Revenue & Customs (HMRC) provides generous tax reliefs on such investments, making it an attractive proposition for investors.

Criteria for EIS investments

To qualify for EIS tax relief, a business must meet certain criteria. The government designates EIS-qualifying companies to focus funding on specific sectors, which may evolve over time.

Generally, EIS-qualifying companies are small trading businesses not listed on any stock exchange. They must have been trading for less than seven years (or ten if classified as knowledge-intensive), be UK-based, have fewer than 250 employees, and possess gross assets totaling less than £15 million before investment (or £16 million afterward).

Certain business sectors are excluded from EIS. These include

  • forestry, farming and market gardening
  • operating/management of hotels and care homes
  • legal and accountancy services
  • energy generation
  • coal
  • steel and shipbuilding
  • land acquisition
  • property development or leasing
  • dealing in goods other than normal retail or wholesale distribution
Required Investments

Investors must purchase new shares rather than existing ones when investing in an EIS-qualifying business. The invested funds must be utilized by the business within 24 months to fuel growth, not for covering ongoing expenses.

EIS qualifying businesses can raise a maximum of £5 million annually through this type of funding, with a lifetime cap of £12 million.

Available EIS reliefs

Investors in EIS qualifying businesses can access various tax reliefs.

Acquired shares through EIS must be held for at least three years in order to obtain full relief. Therefore, if you dispose of shares within three years of purchase, you may be asked to repay reliefs to HMRC.

Income tax relief

When investing in an EIS qualifying business, you can get up to 30% in income tax relief. Thus you can clam 30% relief on investments up to £1,000,000 in a single tax year. This means a potential tax savings of up to £300,000 if you have sufficient income tax liabilities.

Certain businesses are Knowledge Intensive (KI). There are businesses that carry out research, development and innovation. If the qualifying EIS business is classed as a KI, there is further incentives by investing an additional £1m which brings the total allowed investment to KIs to £2m in a tax year.

You must keep the shares in the business for three years and the business must remain EIS-qualifying within the three years period.

EIS gains relief

If you sell the shares in the EIS business at a profit, any gains made over the purchase price are 100% tax-free. However you must have already claimed income tax relief to be able to claim the gains on disposal relief.

Capital gains tax relief

This provides the ability to reinvest gains from other assets into EIS shares, deferring the gain indefinitely. This is available provided the money stays invested through EIS.

To qualify, gains must be reinvested either 12 months before or three years after the gain has been made.

Inheritance tax relief

There is a 100% relief from inheritance tax on investments held for at least two years at the time of death.

Loss relief

If you sell shared from EIS business at a loss, HMRC allows to offset these losses, minus income tax relief, against your income tax bill.

How to claim EIS tax relief

To claim EIS tax relief, you need to obtain an EIS3 certificate from the EIS-qualifying business. On the income tax return, you need to declare the total amount of EIS qualifying investments.

It is of paramount importance to get everything right when claiming such tax relief. If in doubt, speak to one of our professionals here at Lera Accountancy so that we can help you make the right choice.

EIS alternatives

Other schemes encouraging private investment include Venture Capital Trusts (VCTs) and the Seed Enterprise Scheme (SEIS), offering similar tax reliefs with different investment thresholds.

EIS tax relief in the future

While EIS reliefs are currently set to expire in April 2025, the government intends to extend the scheme beyond this date. However, uncertainties remain, and investors are encouraged to seek professional advice for tax management and investment decisions.