What is EIS?
Launched in 1994, the Enterprise Investment Scheme (EIS) is a government scheme designed to help small higher-risk companies to raise capital, by providing tax reliefs for investors who subscribe for qualifying new shares in these companies. Investments in EIS are deemed high risk, so make sure you read our full risk warnings below.
The success of the EIS scheme has seen the launch of the Seed Enterprise Investment Scheme (SEIS). Click here for more info.
Under the current legislation investors are entitled to 5 generous tax reliefs from investing in the Enterprise Investment Scheme, providing shares are held for a minimum of 3 years:
30% Income Tax Relief
Capital Gains Tax (CGT) Deferral
Inheritance Tax (IHT) Exemption*
Tax Free Capital Gains
* To benefit from the above tax reliefs, shares must be held for three years from the date of investment and the issuing company has maintained its qualifying status. Investments are free from inheritance tax (IHT) as long as the Investment has been held for two years and is held at the time of death.
The information given above provides only a summary of the tax benefits. The rates shown are based on current UK legislation which could change in the future, possibly retrospectively. These tax benefits depend on individual circumstances. At Kin Capital we cannot give out tax advice. If you are unsure of your tax situation you should seek professional advice from a qualified tax adviser. Tax rules and regulations can be subject to change.
How Much Can I Invest?
Investors can invest up to £1 million in EIS qualifying companies per tax year, or £2 million if at least £1 million is invested in ‘knowledge-intensive’ companies.
Income Tax Relief
Investors can claim up to 30% income tax relief, which can be taken in the year the investment is made or using ‘carry back’, claimed in the tax year before. Income tax relief can only be claimed if you have a sufficient income tax liability, and shares must be held for three years, otherwise tax relief can be withdrawn.
Eligibility for income tax relief is restricted to companies with which you are not connected at any time during a period beginning two years before the issue of shares and ending three years after that date, or three years from the commencement of the trade if later.
Capital Gains Tax (CGT) Deferral
CGT is normally charged when certain capital (or ‘chargeable’) assets are sold at a profit (e.g. by selling investments or a second home). However, deferral relief means it is possible to defer a CGT payment, if you invest the proceeds of the capital gain into shares in an EIS qualifying company. The chargeable CGT is deferred for the life of the investment. You can defer gains made in the 3 years prior to your EIS investment or 12 months after.
Should the value of your EIS investment make a loss, it may be possible to apply for Loss Relief. The amount of the loss is restricted by the amount of the EIS income tax relief still attributable to the shares disposed of.
A capital loss arising on the disposal of EIS shares can be set against income in the year, or previous year, in which the EIS investment is disposed of, instead of being set off against any capital gains. By helping to minimise the impact of the loss, this relief may ultimately improve the risk/return profile of your investment.
To qualify under the EIS, both the investor and the company must meet a number of conditions. The investor, or someone who is connected with them, must not be an employee or director before their investment. Appointment as a directly subsequently is possible. In addition, investors must not hold more than 30% of any of the following (in neither company itself or of a 51% subsidiary of the company):
- voting rights
- assets on a winding up
To qualify for the EIS, the gross value of the company must not exceed £16 million after the investment, and there are restrictions to ensure that the EIS capital is at risk and for genuine growth. The company must also be unquoted when the shares are issued, have fewer than 250 full-time employees (or the equivalent) and have raised less than £5 million under any of the venture capital schemes in the 12 months ending with the date of the relevant investment.
What is a Knowledge-Intensive Company?
From 6 April 2018, the UK Government effectively doubled the annual EIS allowance for individuals, giving investors the ability to invest up to £2m a year in EIS if more than £1m is in Knowledge-Intensive companies.
In addition, the Government raised the limit on the amount that a Knowledge-Intensive company can receive in EIS funding from £5m annually to £10m annually.
The term “Knowledge-Intensive company” refers to young and innovative businesses that meet specific criteria identified by HMRC: To qualify as a Knowledge-Intensive company, an enterprise must:
- Have less than 500 full-time equivalent employees when it first issues stock
- Have spent at least 15% of its overall operating costs on innovation or research and development in at least one or more of the past three years, or
- Have spent at least 10% of its overall operating costs on innovation or research and development in every one of the past three years
- Be carrying on a trade to create intellectual property
- Have 20% of its employees conducting research and development when the enterprise receives investment funds
Hayley invests £100,000 in shares in Company A. In this case, income tax relief will be worth £30,000 (30% of £100,000). The net cost of Hayley’s EIS investment is therefore £70,000 (£100,000 – £30,000). Hayley also reclaims CGT of £28,000 on a previous £100,000 gain 2 years ago taxed at 28%. Note: the gain is only deferred until there is a chargeable event, i.e. disposal of shares.
In the second column, the company performs well and after three years, another company has made an offer to acquire all shares in Company A. Hayley will receive £150,000. Her gain of £50,000 is exempt from CGT as the shares have been held for at least three years. The £28,000 CGT previously deferred comes back into tax again at current rates of CGT, unless the £100,000 is reinvested again into EIS shares.
In the third column, the company performs badly and is written off after three years. Hayley will receive £61,500 or 61.5% of her original investment. The original £30,000 income tax relief and £31,500 in EIS loss relief on her net cost of the investment of £70,000 (£100,000 – £30,000 income tax relief) at 45% marginal income tax rate, assuming she is an additional rate taxpayer. So, all in all, a net loss of £38,500 or 38.5% of her original investment of £100,000.
EIS shares must be held for a minimum of three years to benefit from income tax relief, and as such should be seen as a long-term investment.
If your shares are sold before you have had them for 3 years (for instance, if the company exits), you will have to inform HMRC and repay any income tax relief you have claimed.
You cannot claim relief until the company sends you an EIS3 form, which it cannot do until it has been trading for at least 4 months.
Your claim can be made on the Self Assessment tax return for the tax year in which the shares were issued. If you have an EIS3 for a year for which you have not yet received a tax return you can request a change to your PAYE (Pay As You Earn) tax code, or an adjustment to any Self Assessment payment on account due. You will still have to make the claim itself on your tax return when you get it.
Claims can be made up to 5 years after the investment was made.
Once the company has been trading for 4 months, follow the below steps:
- The company will then prepare all the necessary paperwork following a successful funding round. They will then make a list of investors who are interested in receiving tax relief, and then send this information to HMRC. HMRC are working hard, however this process can take up to 6 weeks.
- Once the certificates are with HMRC it will be approximately 6-8 weeks before they are sent to the company to sign.
- Once signed the company will then send the certificates to you by post.
- You can then claim any relief you are eligible for by sending the ‘claim form’ section of the SEIS3 or EIS3 form to HMRC.
If you are not in a position to send the claim form, the documentation you are sent will direct you on alternative ways to claim your tax relief.