Enterprise Investment Schemes (EIS) were introduced by the government in 1994 as a way of encouraging investments into “smaller UK business” by offering attractive tax reliefs to investors in qualifying businesses.
Since then there has been increasing investment into EIS qualifying companies, nearly £14billion has been invested in helping 24,600 businesses with £1billion invested in the last year alone.
In order to qualify for EIS status there are specific rules about the business, including that the business must generally be no more than 7 years old, have less than 250 employees and there is a £5 million investment limit from all venture capital schemes.
The investment can be made by investing in a single company or using a professional investment manager who can create a portfolio of carefully selected EIS qualifying companies to provide additional diversification. An EIS must be held for at least three years from the date your investment completes and your shares allotted. It often takes up to six months to be fully invested and six months to exit, so it’s important to note that the investment could be held for four years.
Tax benefits of an EIS are:
- Income tax relief -up to 30% income tax relief on investments of up to £1 million in any tax year (or tax relief up to an amount equal to the investor’s income tax bill if less).
- Capital Gains Tax deferral – 100% capital gains tax deferral for the life of the investment. Liability is eliminated if the investment is held at death. Unlike income tax, there is no limit on the level of capital gains which can be deferred using an EIS.
- Inheritance tax relief – 100% inheritance tax relief after two years (provided the investments are held at the time of death) and dependent on investee companies maintaining qualifying status.
- Tax free growth – there is no capital gains tax if the EIS investment increases in value.
- Loss relief – this is defined as the tax that an investor can claim back, should their investment fall below the “effective” cost of that investment. The “effective” cost of an investment is equal to the amount invested less any claimed income tax relief.
We often use EIS for clients who already have a portfolio of investments and are experienced investors, comfortable with the higher risk nature of both investing in smaller listed and unlisted companies which offer higher potential returns with significant tax benefits.
For some business owners, they find investing into an EIS can be a very attractive way of extracting profit from their business. Often these profits are taken as a dividend. The tax on the dividend can be offset by making an EIS investment. For example, £100,000 dividend would be taxed at 32.5%, (if all in excess of the dividend allowance and all within the higher rate band), if the £100,000 was then invested into the EIS there would be 30% income tax relief which means extracting the cash from the business would be a net cost of 2.50%.
Enterprise Investment Schemes are very high-risk investments. An EIS investment is usually concentrated in one single unquoted trading company, or a small number of such companies. Often there is no market for the shares and it may therefore be very difficult to make a disposal.
Due to the nature of the underlying companies, there is a higher risk of such a company(ies) failing.
If you would like more information on Enterprise Investment Schemes please get in touch with me.