What is EIS?
The Enterprise Investment Scheme (EIS) is a tax friendly way for individuals to invest up to £1,000,000 per year, in rising UK businesses that qualify for the scheme.
This UK government incentive aims to encourage private investors to commit their capital to high-risk UK businesses, to help them raise equity finance, by offering a series of attractive tax reliefs to investors.
By encouraging investment in new shares issued by these UK qualifying companies, EIS aims to improve economic growth through the flourishing of small businesses, the foundation of the UK economy. A prerequisite for qualifying businesses is that any capital raised from EIS investors must be channeled into developing and expanding the business and can’t be applied towards trade, acquisitions of another company’s shares or various types of trading asset.
At the same time EIS offers those investors who are willing to support these burgeoning, higher-risk small businesses large incentives; some sort of compensation, in the form of tax benefits, for the risks involved with such an investment.
These tax incentives are offered in a bid to encourage investment by reducing the downside risks of investing, with the added upside potential of a significant return on your investment should the business prosper. Taking advantage of the full tax reliefs an individual investor can receive tax reliefs of up to 98% of the capital invested; A significantly attractive benefit of an EIS investment.
Exemption from capital gains tax (CGT)
Tax-free growth of your capital investment in the form of exemption from capital gains tax is a significant benefit of an EIS investment. This exemption applies only to capital gain attained on the relinquishment of shares that have been held by the investor for at least three years, on the condition that income tax relief has been granted.
Income tax relief of up to 30% of the amount invested
An investor can receive income tax relief of up to 30 per cent on investments of up to £1m every year. This limit was increased in April 2018 to £2m each year provided all monies over £1m are invested in ‘knowledge intensive companies’.
Exemption from inheritance tax
Another major benefit of an EIS investment is, provided certain conditions are matched, investors can receive up to 100% inheritance tax business property relief.
To benefit from this incentive, investors need to have held full risk, ordinary shares or non-cumulative fixed preference shares in a qualifying unlisted business for at least two years.
With no cap on the amount of capital individuals can invest in EIS businesses for inheritance tax relief purposes, this is a very favourable incentive for many investors.
CGT deferral relief
Deferral relief on capital gains you have made elsewhere; of up to 28% for residential property gains or carried interest; and 20% on other gains made; can be claimed against capital gains acquired up to three years prior to, or one year following, the commencement of an EIS investment. Should you decide to sell the EIS shares deferred gains will be deemed taxable and CGT deferral relief withdrawn.
If an investor decides to sell shares bought in an EIS business and a loss is made at the time of disposal, there’s an opportunity for the investor to reduce the loss by making a claim against the loss, net of income tax relief. This can be made against the current year or on future capital gains, or, by election, against income of the current or previous tax year.
Choose the Right Company to Invest in
It’s crucial to invest in the right business when deciding on EIS as an investment option. Careful consideration should be given to the type of qualifying company you wish to invest in, placing importance on the merits and business acumen of the individual company.
The aim of the EIS scheme is to support small to medium size higher-risk factor businesses, so not all types of trade are eligible for the EIS scheme. A list of the categories of trade which are excluded from the scheme is available, which includes property development; coal and steel production; banking; insurance; and money lending, to name a few.
Taking a risk on higher-risk companies can feel like a daunting prospect but the potential of high financial rewards and big tax benefits make it a risk many serious investors are happy to take.
It would be shrewd to gain expert advice from property investment experts as well as your financial and tax advisers to find the best EIS business investment opportunity for your personal situation so your invested capital can truly reap the profitable benefits associated with an EIS investment.