What is EIS tax relief?

What is EIS tax relief?

The Enterprise Investment Scheme (EIS), launched in 1994 by the UK Government, is designed to boost investment into smaller and unquoted companies.

Early Stage investing is an attractive proposition, but it is without a doubt a higher risk/reward strategy

Early stage investments are perceived as risky as companies often have lower traction and revenue than established businesses. This is why they are almost always part of a balanced portfolio.

Although deemed as precarious, early stage investments come with the advantage that investors can buy company shares – in a business that has identified an addressable market, yet to be exploited – at a much lower price.

In order to encourage investment in start-up companies which play a vital role in the economy, the UK government has launched several tax reliefs, including the Enterprise Investment Scheme (EIS).  EIS enables early stage companies to raise money in exchange for equity, whilst providing generous tax relief to individual investors.

EIS in practice

A £100k investment yields an extra £212k for private investors thanks to the Enterprise Investment Scheme (EIS).

How do businesses qualify for EIS?

Under the EIS scheme, a company is able to raise up to £5m per year and a maximum of £12m through its life cycle.  A company will qualify for investment under EIS within seven years of its first

A further perk was introduced last year; the Knowledge Intensive Scheme. Businesses are eligible for this if they are carrying out research, development or innovation, at the time shares are being issued. Companies that meet the criteria are eligible to receive up to £10m of investment per .

How do investors benefit?

Investors can invest up to £1m per tax year in EIS qualifying companies for the tax relief; this cap rises to £2m if investing in knowledge-intensive EIS companies. As a bonus, the scheme offers a carry back option, enabling investors to invest any unused relief to the previous tax year.

  • 30% INCOME TAX RELIEF – By investing in an EIS eligible company, you are able to reduce your tax bill by 30% in that year.
  • NO CAPITAL GAINS TAX – All profits generated through the sale of EIS qualifying shares are tax free.
  • NO INHERITANCE TAX – EIS shares are free of inheritance tax.
  • OFFSETTING LOSSES – Losses can be offset against income tax. Assume an investor invested £10,000 and the company went bust; under non-EIS circumstances the entire investment of £10,000 would be lost. However, under EIS the actual loss is only £7,000, due to the 30% income tax relief. However, if you are a higher rate income tax payer – say 40% – you are able to offset your loss by 40%. This will result in a further saving of £2,800, so the actual loss would be £4,200.
  • Shares must be held for a minimum of 3 years.

The tax relief restarts at the end of the tax year. The tax year runs from 6th April to the 5th of April the following year. Investors can benefit from this year’s tax relief if the investment is made before the 5th of April.

Click here to view EIS qualifying deals