The Enterprise Investment Scheme (EIS) is a government scheme designed to help smaller higher risk companies raise finance. It does this by offering a range of tax reliefs to investors.
The scheme is only open to companies from qualifying industries. On top of this, to be included in the EIS, a company must:
- have gross assets of less than £15 million before the investment and no more than £16 million after
- have fewer than 250 staff
- be unquoted
- have only fully-paid issued shares
- be a trading company with a permanent establishment in the UK in a qualifying industry
- exist for genuine commercial purposes (not as part of a tax avoidance scheme)
- not be a 51% subsidiary of another company.
- potential investors must not directly or indirectly own 30% of the shares of a qualifying company
- paid directors or employees of an EIS company cannot claim EIS relief
- money raised by an EIS share issue has to be used solely for the qualifying business activity
- tax relief cannot be claimed on schemes that involve guarantees or exit arrangements.
There are a range of potential tax reliefs for investors associated with the EIS:
- income tax relief at the 30% rate of tax on the amount invested (with an annual maximum of £1,000,000)
- a further £1,000,000 is available for investment in knowledge-intensive companies
- any gains resulting from the disposal of the shares after 3 years will be free from capital gains tax (provided that any amount of income tax relief has been claimed)
- capital gains can be deferred by reinvesting them in an EIS company either 1 year before or 3 years after the gain occurred
- relief for losses made on the disposal of EIS shares.
Tax rules and allowances are not guaranteed and may change in the future. EIS investments can be high risk and are not suitable for most investors. Specialist advice is essential to establish both eligibility and suitability for such investments. Whilst EIS investments may have significant tax benefits, the value of investments can fall as well as rise and you may not get back all, or even any, of the amount you originally invested.