Enterprise Investment Scheme (EIS)

Understanding the Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is a UK government venture capital scheme to encourage investments in small unlisted companies carrying on a qualifying trade in the UK. Introduced in 1994, EIS provides an array of tax reliefs to investors who purchase new shares in those companies, ensuring that adequately funded small businesses have the capital they need to grow and prosper.

By offering generous tax incentives, including income tax relief and capital gains exemptions, EIS aims to mitigate the inherent risks of investing in new ventures, thereby attracting investments that might otherwise be directed towards more stable, lower-risk opportunities.

Key Features of the EIS

Income Tax Relief: Investors can claim income tax relief of 30% on investments of up to £1 million per tax year, or up to £2 million if the amount over £1 million is invested in knowledge-intensive companies.
Capital Gains Tax Exemption: Any gain is free from Capital Gains Tax if the shares are held for at least three years and the income tax relief was given and not withdrawn.
Loss Relief: If the investment loses money, the loss can be offset against income or capital gains tax.
Capital Gains Tax Deferral Relief: Capital gains tax on a different asset can be deferred if the gain is reinvested in EIS shares.

Examples

New Tech Startup Investment: If an investor puts £100,000 into a qualifying technology startup, they can immediately claim £30,000 back as income tax relief, reducing the effective cost of their investment to £70,000.
COVID-19 Impact Relief: Suppose investors have suffered losses due to the COVID-19 pandemic. Investing their funds in EIS-eligible companies not only helps in potentially recovering losses but also provides tax-efficient savings.

Frequently Asked Questions (FAQs)

1. Who qualifies for EIS tax relief?

Any UK taxpayer can claim EIS tax relief, subject to their share subscriptions and compliance with prescribed conditions.

2. What types of companies can qualify for EIS?

Companies must be small, high-risk, unquoted, carry out a qualifying trade, and not be controlled by another company to qualify for EIS.

3. How long do I need to hold EIS shares to benefit from tax relief?

Shares must be held for a minimum of three years from the date of issue for income tax relief and CGT exemption to apply.

4. Can investors invest in their own companies through EIS?

Generally, no. There are restrictions on connected individuals, which usually prevent directors, employees, and their families from benefitting from EIS reliefs.

5. Is there a limit to how much one can invest in EIS each tax year?

Yes, there is a limit of £1 million per tax year, or up to £2 million if the investor is investing in knowledge-intensive companies.

Seed Enterprise Investment Scheme (SEIS): Provides tax relief for investing in very early-stage companies (up to £150,000 per company).
Venture Capital Trusts (VCTs): Investment schemes providing risk capital finance to small expanding firms.
Loss Relief: The ability to reduce income/capital gains by the amount of the loss.

Online References

Suggested Books for Further Studies

“The Enterprise Investment Scheme and Business Investing”, by Daniel Hall
“Tax-Efficient Venture Capital: Enterprise Investment Scheme and Business Angel Investing”, by John Bedward
“Angel Investing: Matching Startup Funds with Startup Companies–The Guide for Entrepreneurs and Individual Investors”, by Gerald W. Benjamin and Joel B. Margulis

Accounting Basics: “Enterprise Investment Scheme (EIS)” Fundamentals Quiz

### What primary purpose does the Enterprise Investment Scheme (EIS) serve? - [x] To help smaller, higher-risk companies raise finance. - [ ] To support large, established firms. - [ ] To replace traditional bank loans. - [ ] To encourage foreign investments in UK real estate. > **Explanation:** The EIS is designed to help smaller, higher-risk companies in the UK raise finance by offering tax relief to investors. ### Which tax relief is NOT offered under the EIS? - [ ] Income tax relief - [x] Property tax relief - [ ] Capital Gains Tax Exemption - [ ] Loss Relief > **Explanation:** The EIS provides income tax relief, capital gains tax exemption, and loss relief, but not property tax relief. ### How much income tax relief can an investor claim under the EIS? - [ ] 20% - [x] 30% - [ ] 50% - [ ] 10% > **Explanation:** Investors can claim income tax relief of 30% on investments in EIS-qualifying companies. ### What is the required holding period for EIS shares to qualify for tax relief? - [ ] 1 year - [ ] 2 years - [x] 3 years - [ ] 5 years > **Explanation:** Investors must hold EIS shares for at least three years to qualify for all associated tax reliefs. ### Can the loss from an EIS investment be offset against income? - [x] Yes - [ ] No - [ ] Only against capital gains - [ ] Only through future gains from similar investments > **Explanation:** If the EIS investment results in a loss, it can be offset against the investor’s income tax. ### What is the investment limit per tax year for EIS, unless investing in knowledge-intensive companies? - [ ] £500,000 - [ ] £1 million - [ ] £2 million - [x] £1 million with potential increase to £2 million for knowledge-intensive companies > **Explanation:** The general limit is £1 million per tax year, which can be doubled to £2 million for investments in knowledge-intensive companies. ### When was the Enterprise Investment Scheme (EIS) introduced? - [ ] 2000 - [ ] 1988 - [x] 1994 - [ ] 2010 > **Explanation:** The EIS was introduced by the UK government in 1994. ### Which type of investors typically benefit the most from EIS? - [ ] Foreign investors - [ ] Large corporations - [x] High-net-worth individuals and business angels - [ ] Government bodies > **Explanation:** EIS primarily benefits high-net-worth individuals and business angels due to the significant tax reliefs offered against their substantial investments. ### What are the criteria for a company to qualify for EIS? - [ ] It must be a subsidiary of a larger company. - [ ] It must operate internationally. - [ ] It must be a small, unlisted company involved in a qualifying trade. - [ ] It must have over 500 employees. > **Explanation:** For a company to qualify for EIS, it must be small, unlisted, and engaged in a qualifying trade within the UK. ### Can EIS tax relief be claimed for investments in publicly listed companies? - [ ] Yes, in all listed companies. - [ ] Only in large cap stocks. - [ ] Only for penny stocks. - [x] No, only unlisted companies qualify. > **Explanation:** EIS tax relief cannot be claimed for investments in publicly listed companies, as the scheme is aimed at supporting small, higher-risk unlisted companies.

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