A government-backed initiative, the enterprise investment scheme was designed to encourage individual investors to buy shares in higher-risk companies by offering generous tax reliefs to those who invest.
To be eligible for funding under the EIS, a business must be within seven years of its first commercial sale, not have gross assets worth more than £15m before shares, and have less than 250 full-time employees.
It’s true that investing in less established businesses may carry a greater investment risk. However, there is the potential for higher returns and the tax relief available can minimise any loss should the worst happen.
Income tax relief
Of all the benefits of investing in an EIS, one of the most attractive is the income tax relief you can receive. You can claim relief for a maximum annual investment of £1m, or £2m if you have invested in a knowledge-intensive company.
You can claim for up to 30% of your investment, meaning that you could receive up to £300,000 tax relief a year - or £600,000 for investments in knowledge-intensive companies. This is one of the most generous tax relief schemes currently on offer in the UK.
Loss relief
Of course, returns are not guaranteed when investing in early-stage companies, and indeed most investments carry an element of risk. However, the EIS provides attractive loss relief at your marginal tax rate.
When this loss relief is combined with the income tax relief received when investing in an EIS eligible company, it greatly reduces the amount of capital at risk.
Since its launch, the EIS has been pivotal in helping small to medium, new starter companies in the UK achieve vital growth capital.
Over the last two decades, the scheme has helped EIS businesses access billions of pounds which might otherwise have been ploughed into lower risk companies. The EIS stipulates that those receiving investment under the scheme must use it to grow their business - increasing revenue, customer base and number of employees.
Profits are tax free
Another initiative of the EIS are the capital gains tax (CGT) advantages. For most non EIS investments, any returns will be liable for CGT above the CGT-free personal allowance. When investing in an EIS, provided all the conditions are met, all growth in value is exempt from CGT, meaning investors can achieve a greater net profit, while saving their personal allowance for other investments.
The use of the scheme is subject to detailed conditions. Therefore, it is important these are met otherwise investments may not qualify. If in doubt, it is best to seek advice from a specialist EIS accountant.
