Enterprise Investment Scheme: Unlocking Tax Reliefs for Growth
The Enterprise Investment Scheme (EIS) stands as a potent tool for eligible investors, providing them with up to 30% income tax relief on investments up to £1 million per tax year. This allowance extends further, with an additional £1 million offered for investments in knowledge-intensive companies. EIS is a well-established UK government initiative designed to assist smaller high-risk trading companies in raising finance by offering various tax reliefs to investors who acquire new shares in these companies. When a business is identified as ‘EIS’ on platforms like Crowdcube, qualifying investors can access this tax relief.
Benefits of EIS Tax Relief
- Income Tax Relief: Investors can claim a tax relief of up to 30% on investments up to £1 million. For investments in “knowledge-intensive” companies, an additional £1 million is eligible for the same 30% tax relief. The condition for “knowledge-intensive” eligibility involves a strict definition by HMRC, including factors like innovation spend and research workforce proportion.
- Capital Gains Tax Disposal Relief: Shares held for at least three years become Capital Gains Tax (CGT) free, provided the income tax relief on the shares was claimed.
- Loss Relief: In the event of a loss upon disposal of shares, investors can elect to set the loss amount, reduced by Income Tax relief, against income of the same year or the preceding year. This flexibility prevents losses from being offset against capital gains.
- Capital Gains Tax Reinvestment Relief: Reinvestment of capital gains into shares of an EIS-qualifying company allows deferral of CGT payment. The investment must occur one year before or three years after the gain’s occurrence. Both unconnected investors and those with a connection to the company are eligible for relief from Income Tax and CGT deferral.
Available EIS Tax Reliefs
- Income Tax Relief: No minimum investment is stipulated for EIS in a single company per tax year. A 30% tax relief can be claimed on investments up to £1 million, providing a maximum tax reduction of £300,000. For investments in “knowledge-intensive” companies, the same 30% tax relief applies to an additional £1 million. EIS allowances are allocated individually, enabling a married couple to each invest up to £2 million and qualify for Income Tax relief. All shares must be held for a minimum of three years from issuance to retain tax relief.
- Capital Gains Tax Disposal Relief: Shares held for a minimum of three years and having claimed income tax relief result in a capital gain being CGT free.
- Loss Relief: Upon disposal of shares at a loss, investors can elect to offset the loss, minus Income Tax relief, against income of the current or preceding year, offering greater flexibility.
- Capital Gains Tax Reinvestment Relief: Reinvesting capital gains into EIS-qualifying company shares defers CGT payment. The investment must occur between one year before and three years after the gain, regardless of investor-company connection.
Examples of EIS Relief in Action
Case 1
Company value doubles, shares held for three years
Investment = £10,000
Income Tax relief = £3,000
Share sales = £20,000
Total gain = £13,000
Case 2
Company value remains constant
Investment = £10,000
Income Tax relief = £3,000
Capital Gains Tax = £Zero
Total gain = £3,000 (from income tax relief)
Case 3
Company closes, shares worth nothing
Investment = £10,000
Income Tax relief = £3,000
At-risk capital = £7,000
Loss relief on at-risk capital @ 45% = £3,150
Actual loss = £3,850 (£10,000 – [£3,000 + £3,150])
EIS-Eligible Companies
Companies may be eligible for EIS funding if they:
- Made their first commercial sale within 7 years
- Possess gross assets below £15 million
- Employ fewer than 250 individuals
“Knowledge-intensive” companies can be up to 10 years old and have stricter eligibility criteria. Find complete eligibility details here
