The Enterprise Investment Scheme (EIS) is a government initiative, introduced in 1994, created to encourage investment in small and medium sized companies which by their nature are generally considered high risk.
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 of the investment.
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 EIS qualifying companies, purchased on behalf of investors under the terms of a discretionary management contract. The investee companies will be chosen to fit the parameters of a common investment policy.
To qualify for EIS benefits, a company must meet many criteria as defined by HMRC. The company must be an unquoted company at the time the shares are issued. That means it cannot be listed on the London Stock Exchange or any other recognised stock exchange. It can subsequently become a quoted company without the investors losing relief, but only if there were no arrangements for it to become quoted in existence when the shares were issued. For the EIS rules the Alternative Investment Market (AIM) and the PLUS Markets (with the exception of PLUS-listed) are not considered to be recognised exchanges, so a company listed on those markets can raise money under the EIS if it satisfies all the other conditions. The PLUS-listed market is regarded as a recognised stock exchange and shares listed on that market at the time of issue will not qualify for EIS.
EIS benefits include the following tax breaks:
- 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 (or, if later, three years after the start of the qualifying trade) and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in a withdrawal of the tax reliefs.
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 investments should be considered high risk, long-term investments, being at least three to five years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest.
For further details of the investment risks please see the Key Risks section of this website and for further details of the tax advantages please see the Tax Treatment section of this website. Tax treatment is dependent on the circumstances of each individual and may be subject to change in the future.