The Enterprise Investment Scheme (EIS) is a series of UK tax reliefs launched in 1994 in succession to the Business Expansion Scheme. It is designed to encourage investments in small unquoted companies carrying on a qualifying trade in the United Kingdom.

By the end of the 2014–15 tax year, a cumulative total of £14.2 billion had been invested under the scheme into approximately 25,000 companies. In that year, in excess of £1.8 billion was invested under the EIS.

Purpose

Investment in companies that are not listed on a stock exchange often carries a high risk of loss of capital, and low market liquidity means that it may be difficult or time consuming to sell or realise the investment. The tax reliefs available under the EIS are intended to offer investors some incentive to counterweigh those risks. A brief summary of the tax benefits is as follows:

  • 30% up front income tax relief, which can be carried back to the previous tax year. The maximum subscription is currently £1,000,000 per investor per year (this rises to £2,000,000 per year if the companies are deemed 'knowledge intensive'), yielding a potential reduction in tax liability of £300,000 per annum (assuming the investor has sufficient income tax liability).
  • No CGT to pay on any gains made when the investment is realised after three years (five years for investments made before 6 April 2000), provided the EIS initial income tax relief was given and not withdrawn on those shares.
  • EIS shares do not form part of the estate for inheritance tax purposes, provided the investments have been held for at least two years at time of death and the company qualifies for business property relief (BPR).

Qualifying companies and individuals

The rules for qualifying are complicated; for example, the following are some of the qualifications that must be met:

  • Entry into the scheme is subject to a decision and audit made by an appointed tax officer
  • The company must not be listed or have any intention of becoming listed at the time of the investment
  • The company must not have already received in excess of £12 million total funding (or £5 million within any given year) from the following sources: EIS, SEIS, Venture capital trusts, social investment tax relief, or some forms of state aid.

The individual

  • The investor may not have more than a 30% interest in the company
  • No partner or associate of the investor (including spouse, relations, prior business contacts) may have other interests in the company
  • The investor must not have any form of preferential shares
  • The investor must not have any other form of controlling interest in the company
  • The scheme must not be used for the purposes of avoiding tax

Seed Enterprise Investment Scheme

On 6 April 2012, the Seed Enterprise Investment Scheme (SEIS) was launched, with the goal to "stimulate entrepreneurship and kick start the economy."

References

  • Enterprise Investment Scheme Association
  • Venture Capital Schemes Manual – HMRC
  • What is the Enterprise Investment Scheme – IW Capital
  • Enterprise Investment Scheme Guide – Syndicate Room