What is the Enterprise Investment Scheme (EIS)?
Launched in 1994, The Enterprise Investment Scheme (EIS) is a well-established UK government scheme that helps younger, high-risk businesses raise finance by offering generous tax reliefs to investors.
You can claim EIS relief on up to £1 million worth of investments in qualifying businesses per year, or £2 million worth of investments if you’re investing in knowledge-intensive companies which often require a greater level of finance.
The scheme also has a carryback clause meaning you can apply your EIS-eligible investments to the preceding tax year.
So far, the scheme has promoted more than £10 billion of private investment.
The success of EIS led to the launch of the Seed Enterprise Investment Scheme (SEIS), allowing investors to invest in companies at an even earlier stage of development. As they are very young companies they are riskier, but investors using SEIS can benefit from even greater tax relief.
How does EIS work?
Investment is required if young companies are going to have adequate finances to facilitate their growth. EIS is designed to allow businesses to raise money to help them grow.
The UK government recognises that investors need incentives to invest in these companies, so it designed legislation to reflect the value of this investment. EIS is just one venture capital scheme that offers tax relief to individual investors who buy new shares in a qualifying company.
Under EIS, a company can raise up to £5 million each year (up to a maximum of £12 million in the company’s lifetime) and investors can receive a good return on investment.
What is EIS tax relief?
To encourage investment in young, high-risk companies that need financial backing in order to grow, EIS tax relief was created by the UK government.
These tax reliefs include:
- Income tax relief
Income tax relief applies to 30% of your investment and is to be used in the year of investment or carried back one year.
You can claim this relief on investments up to a cap of £1 million, or £2 million if at least £1 million is invested in knowledge-intensive companies.
For example, a tax reduction of £300,000 can be claimed if you have invested £1 million into EIS-qualifying opportunities (as long as you have sufficient Income Tax liability to cover it).
Companies can apply to HMRC for EIS ‘advance assurance’ which gives a provisional indication of whether a company may be eligible to apply for tax relief for its investors, although there is no guarantee that an investment will qualify for EIS.
It is required that shares be held for at least three years from the date of issue. Tax relief will be given at the outset but can be clawed back if you dispose of the shares before the end of this three year period.
It is useful to note that EIS allowances are allocated individually.
You can use our EIS investment and tax relief calculator to find out what your return on investment could be.
- Capital Gains Tax exemption
There is a Capital Gains exemption on profits earned on shares that have been held for a minimum of three years, provided you have claimed at least some Income Tax relief on them.
It is possible to accrue your Capital Gains Tax exemption for longer than three years so long as you continue to hold the shares.
- Loss relief
You can access loss relief if the business that you’ve invested in fails, and you can offset your loss against either their Capital Gains Tax bill or Income Tax bill.
This can be claimed the tax year that you realise the loss or the following tax year. Loss relief applies alongside other EIS tax reliefs.
If you need to make a claim it is highly recommended that you seek professional financial advice to get a firm grasp on your specific circumstances and how this impacts your claim.
Does my EIS investment qualify for loss relief?
The value of an investment must have fallen below the ‘effective cost’ when it is sold in order for it to qualify for loss relief.
The effective cost is the amount invested minus whatever you previously claimed in Income Tax relief.
To illustrate, if you invested £40,000 into an EIS-qualifying investment and you then claimed upfront Income Tax relief of £12,000 (equal to 30% of the amount you invested), the effective cost of that investment would be £28,000.
Negligible value claims
Investors using EIS or SEIS can also make a ‘negligible value’ claim when the value of the investment drops to a negligible amount. This claim can be made even when the shares are still owned.
This is in addition to being able to claim relief for a loss when a company liquidates.
If a company has been liquidated, it must be decided whether to make an election to set the loss against income and if this is the case, whether you want to set it against your income in the tax year of the loss or the previous tax year. This must be done before the relevant deadlines.
Loss relief against Income Tax
EIS investors might be able to offset losses against their Income Tax bill for the current or previous tax year under ITA 2007, Section 131.
As Income Tax rates are usually higher than Capital Gains Tax rates, the majority of investors choose to set any loss made against their income and claim relief at up to 45%.
To work out the amount of relief you can claim, multiply the value of your effective loss by your marginal rate of Income Tax.
Loss relief against Capital Gains Tax
Some investors choose to offset their loss against their Capital Gains Tax bill for the current or future tax years. If you want to go down this route, you can calculate the relief by multiplying the effective loss by the rate at which you pay Capital Gains Tax.
- Inheritance Tax exemption
There is an Inheritance Tax exemption on shares that are held for a minimum of three years.
- Capital Gains Tax deferral relief
Investors can access a Capital Gains Tax deferral on gains realised on the disposal of any asset which is reinvested in an EIS eligible company.
If you have capital gains greater than the annual exemption, these can be deferred by making an EIS investment.
If you access Capital Gains Tax deferral relief the gain is frozen and the tax liability is deferred until the EIS shares are disposed of. A further EIS investment can be made to defer the tax liability again. These deferred gains wash out after death.
Regarding time limitations, gains arising up to three years before and one year after the EIS shares are issued can be deferred. There is no limit on the amount that can be invested.
The standard EIS rules specify that you cannot claim tax relief on investments into companies with which you are ‘connected’ to or affiliated with by significant financial interest or employment. However, this rule does not apply where only deferral relief is claimed.
Claiming your tax relief
You should receive an EIS3 from the company you have investments in. This is important, as you need this to claim EIS tax relief.
The amount that you have invested is confirmed on the form and there should be a statement that the investment is eligible for tax relief. Keep this form safe in case HMRC requires it – they may ask to see you’re EIS3 even after your taxes have been processed.
For the tax year in which the shares were issued, your claim can be made through the self-assessment tax return.
For previous years or if the claim is for capital gains deferral relief, the claim part of the form should be completed and sent to your tax office.
There are time limitations. Claims for relief can be made up to five years after the first 31 January following the tax year in which the investment was made.
As long as the limit for relief has not already been exceeded, carryback is possible on all or part of the investment to the preceding tax year.
EIS carry back
You can often ‘carry back’ your EIS investment (all or part of the amount) to the preceding tax year.
This is provided that the limit for relief is not exceeded for that year. The limit for EIS stands at £1 million per tax year or £2 million if £1 million of this is invested in knowledge-intensive companies.
If you buy EIS qualifying shares in the 2019/20 tax year, it is possible to carry back the associated tax relief to the 2018/19 tax year, provided your EIS cap for 2018/19 has not been exceeded.
Difference between EIS and SEIS investment schemes
There are four UK government venture capital schemes intended to help small or medium-sized companies and social enterprises. These schemes offer tax reliefs to individuals who buy or hold new shares, bonds, or assets for a specific period of time.
They were designed to boost investment in these companies, giving them adequate finances to grow.
Two of these scheme options are the Enterprise Investment Scheme (EIS) as discussed and the Seed Enterprise Investment Scheme (SEIS).
Although they are similar, the SEIS has some stricter requirements as it is designed for younger, riskier companies.
The Enterprise Investment Scheme (EIS)
A company (or group of companies if it’s a parent company) may be able to qualify for EIS if at the time of investment it has:
- No more than £15 million in gross assets.
- Fewer than 250 employees.
- Been more than seven years since its first commercial sale.
These limits are higher if the company qualifies for a knowledge-intensive EIS (if they are heavily involved in research, development, or innovation and meet a few further conditions).
The Seed Enterprise Investment Scheme (SEIS)
On the other hand, a company may be able to qualify for SEIS if it is less than 2 years old and at the time of investment has:
- No more than £200,000 in gross assets.
- Fewer than 25 employees.
- Not previously carried out a different trade.
If the company has already had investment through EIS or a Venture Capital Trust (VCT) it will not qualify for SEIS.
EIS investment schemes: which companies qualify?
There are many rules around what type of company qualifies for EIS investment.
Companies can apply to HMRC for EIS ‘advance assurance’ which gives a provisional indication of whether a company may be eligible to apply for tax relief for its investors.
There are different types of EIS with different qualifying requirements, so these can be checked.
There are also rules regarding investing in companies that you are affiliated with or otherwise connected to. Ensure you look into this before investing in a company.
As with any scheme, if a company raises money by a new share issue with EIS, it must be used for a qualifying business activity. These include:
- A qualifying trade (most trades will qualify, see excluded EIS activities).
- Preparing to undertake a qualifying trade (this must start within two years of the investment).
- Research and development that contributes to and is expected to lead to a qualifying trade.
In addition to these requirements, finances must also:
- Be spent within two years of the investment (or if later, the date the company starts trading).
- Not be used to buy all or part of another business.
- Pose a risk of loss to capital for the investor.
- Be used to grow or develop the business
EIS and film investment: Films4U
There’s a lot to take in if you want to get to grips with the ins-and-outs of EIS and venture capital schemes. Nevertheless, it’s important to take a long look at all the information available when making significant financial decisions.
The information contained on this website should not be taken as financial advice or as a personal recommendation by Films4U. Before investing you should always seek appropriate legal and financial advice from an authorised person specialising in investments of this kind.