The Enterprise Investment Scheme (EIS) offers tax incentives to business investors and was set to come to an end in April 2025. The scheme has now been extended by an additional 10 years.
But what EIS reliefs are available? What are the benefits? And can you claim it?
In his latest article, experienced Corporate & Commercial Solicitor Paul Longland answers these questions and more…
What is the enterprise investment scheme?
The Enterprise Investment Scheme (EIS) is a government initiative that encourages investment in small, higher risk businesses.
EIS plays a significant role in these businesses raising money and offers generous tax incentives to investors.
EIS was due to come to an end in April 2025, however, in 2024, the Government confirmed that the EIS sunset clause (the date upon which a specific piece of legislation will cease to be effective) would be extended to 6 April 2035.
So, those who thought they ‘missed the boat’ on the scheme, haven’t!
What are the benefits of EIS?
For those businesses that qualify, EIS makes it easier to raise capital, as it encourages investment in ‘high-risk’ businesses.
Furthermore, EIS targets long-term investors. As such, investment through EIS is more likely to help businesses with their long-term goals.
You should bear in mind that investments in businesses covered by EIS are high-risk; this can be appealing as returns have the potential to be substantial and reap many tax benefits, but, of course, comes with the additional element of risk.
You should always seek your own independent financial advice before making an investment.
Related: What do you need to know when setting up a business?
What is the tax relief on EIS?
EIS offers attractive reliefs, including:
Income Tax relief
You will receive income tax relief of 30% of the amount invested up to £1m (or £2m if investment is made in knowledge incentive companies (KICs)).
*This is subject to a clawback if the shares are disposed of within three years.*
Capital Gains Tax exemption:
If you sell shares that qualified for EIS relief and have held them for at least three years, you won’t pay CGT on profits made.
Capital Gains Tax deferral relief
You can delay paying CGT liability on gains made from selling assets if you reinvest that money into shares that qualify for EIS relief.
This comes with the option of an associated delay of Business Asset Disposal Relief.
Business Asset Disposal Relief and CGT changes were announced in the Autumn 2024 budget. Find out more here.
Inheritance Tax exemption
EIS investments should qualify for 100% IHT business property relief after two years of ownership.
Related: How does Inheritance Tax work and can you avoid it?
What is the EIS loss relief?
In addition to the above tax reliefs and exemptions, if you sell your shares at a loss, you may be able to reduce your income tax liability.
This is known as EIS loss relief and allows you to offset any loss against your income tax.
Who qualifies for EIS?
Certain conditions have to be met in order to benefit from the scheme.
For example, the shares must be ‘ordinary shares’, paid in cash in full at the time they are issued and issued in order to raise money for the purpose of a ‘qualifying business activity’.
In addition, no more than £5m can have been raised in risk finance investments in the previous 12 months (£10m for KICs), and any money raised by EIS shares must be used for said ‘qualifying business activity’ within two years, most commonly from the issue of the shares.
Furthermore, the risk capital condition must be met and HMRC’s list of circumstances for consideration must be considered.
A full list of qualifying conditions can be found here.
Related: What are loan agreements and what should they include?
What is qualifying business activity in EIS?
Qualifying business activity means the company:
- must be actively trading to make a profit;
- use the funds for growth;
- be based in the UK;
- have fewer that 250 employees;
- and less than £15m in assets.
Non-qualifying activities, such as financial services and property development, cannot make up more than 20% of the business.
A full list of activities that are excluded from EIS can be found here.
Related: What makes a strong business contract? Our advice
Are EIS investments worth it?
The EIS certainly has its benefits for both you and businesses looking to raise capital, but before making the investment, we would recommend you seek independent financial advice to decide whether it is the right option for you.
Every business is different so, as a small business, EIS may or may not be suited to you and, as an investor, not every investment opportunity will appeal to you.
Tailored investment and small business advice
At Frettens, our Corporate & Commercial Team would be happy to discuss the EIS with both investors and small businesses, providing tailored advice.
To get in touch, you can call us on 01202 499255 or fill out the form at the top of this page. We offer a free initial appointment for all new clients.
Comments