Private investors can enjoy a range of tax reliefs by investing in The Enterprise Investment Scheme (EIS)
The budget and the enterprise investment scheme (EIS)
The Enterprise Investment Scheme (EIS) is a government initiative created to encourage investment in fledgling British companies – which, by their nature, are generally considered high-risk investments – by allowing them to gain the necessary finance to grow. By investing in new shares in these companies, private investors can enjoy a range of tax reliefs, which are designed to help lower the overall risk profile.
The scheme is not only attractive to investors but good for the UK economy as a whole.
How it works
Investments are either made directly into a pre-identified single company or into an EIS fund. Instead of being structured as a pooled investment, EIS funds commonly refer to a collection of investments in qualifying companies, purchased on behalf of investors under the terms of a discretionary management contract.
To qualify for these benefits, a company must meet many criteria as defined by HMRC. Primarily, the company must be an unquoted company at the time the shares are issued, meaning it cannot be listed on the London Stock Exchange, nor any other recognised stock exchange. It can subsequently become a quoted company without the investors losing relief, but only if there were no arrangements in existence for it to become quoted when the shares were issued. For the scheme, the Alternative Investment Market is not considered to be a recognised exchange, so a company listed on this can raise money via EIS if it satisfies all the other conditions.
EIS benefits for the investor include :
• Tax free capital growth
• Income tax relief at up to 30%
• Up to 100% relief from inheritance tax after two years
• Potential for additional income tax relief on losses
• Potential for Capital Gains Tax deferral
In order to maintain the tax benefits available under EIS, an investor must hold their shares for three years from the date of issue and the company must still continue to meet the qualifying conditions throughout this period. You receive income tax relief of 30% on EIS investments of up to £1m in any tax year. So if you invest £5,000 in a company that is eligible for EIS, you can reduce your income tax bill by £1,500 that year. The maximum income tax relief you can receive is up to your income tax liability. This could reduce your tax bill to nil. Moreover, investors can also elect to treat their investments in EIS shares as if it were made in the previous tax year, up to their maximum allowance of £1m, effectively carrying income tax relief back one year.
How the Autumn Budget will impact EIS
In the Budget it was announced that from April 2018, and in line with State Aid rules, that the annual investment limit for EIS investors will be doubled from £1 million to £2 million, provided that any amount above £1 million is invested in knowledge-intensive companies. Furthermore, it was announced that the annual investment limit for knowledge-intensive firms will be doubled from £5 million to £10 million through the EIS scheme.
Following Royal Assent of the Finance Bill 2017-18, a principles-based test will be introduced into EIS. The new test will ensure that the scheme is focused towards investment in companies seeking investment for their long-term growth and development. Tax-motivated investments, where the tax relief provides all or most of the return for an investor with limited risk to the original investment (i.e. preserving an investors’ capital) will no longer be eligible. The Government has published a note explaining how the test will work, available here.
Being an equity investment, investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. Given that small companies can take time to grow, and an exit may not be immediately apparent for shareholders, EIS should be considered a high risk and long-term investment.
The Share Centre provides administration services to a number of EIS managers & their funds, including:
- Oxford Capital
- Seneca Partners
- Guinness Asset Management
- Parkwalk Advisors
- Draper Esprit
- Amplify Music
- New Model Venture Capital
- Iron Box Capital
- Amadeus Capital Partners
- Creative England
- Elderstreet Investments
- Venrex Investment Management
- Sapphire Capital Partners
- Par Equity
- Javelin Ventures
- Oakfield Capital Partners
The fund managers above make investments on your behalf. In this case, you only get the tax relief as and when your money is invested in the qualifying companies. A few EIS funds that have been specially approved by HMRC give you the opportunity to claim all your tax relief when the fund closes for investment. Additional information can be found by visiting their websites or the EIS Association website: eisa.org.uk.
Please note: EIS schemes are not suitable for every investor. Always seek suitable advice before proceeding.