The Enterprise Investment Scheme (EIS) was introduced in the UK almost 30 years ago, as a series of tax reliefs designed to encourage investment in smaller, private British businesses.
As part of their 2023 Autumn Statement, the Government announced that legislation to extend tax reliefs under the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) from 6 April 2025 to 6 April 2035 will be included in the Autumn Finance Bill 2023. This means that the tax reliefs available under EIS are set to be available for qualifying investments in tax years up to and including 2034/2035, subject to any further extension.
Investment in companies that are not listed on a stock exchange can lead to a higher risk of loss, and it may also be difficult to realise or sell that investment, so EIS was designed to offer incentives to investors to counter those risks.
The scheme, launched in 1994, has always offered significant reliefs for investors – and its sister initiative, the Seed Enterprise Investment Scheme (SEIS), launched in 2012 to attract investment for start-ups, is even more generous. Both schemes have proved increasingly popular in recent years. By the end of the 2021/22 tax year, a cumulative total of more than £30billion had been invested under the scheme into 53,000 companies; in that year alone, more than £2.3billion was invested under EIS.
What reliefs are available under the EIS?
The main tax relief is that 30% of your investment can be immediately claimed back from HMRC if you have sufficient Income Tax liability to absorb it. Although there is no minimum amount an investor can invest in any one company, there is a maximum investment of up to £1million per investor, per year (or up to £2m in Knowledge Intensive Companies (KICs))– potentially leading to a reduction in an investor’s income tax liability of £300,000 (£600,000 for KIC’s).
An investor is able to ‘carry back’ all or part of their investment to the preceding tax year, provided that by doing so they do not exceed the limit for that year. In effect, this would mean that an investor could, for example, invest in £2million of EIS shares in 2022/23, and carry back £1million of that investment to 2021/22. However, investors cannot carry forward their EIS relief.
Further details of reliefs:
- There is no Capital Gains Tax (CGT) to pay on any gains made when the investment is eventually realised so long as the shares have been held for at least three years and income tax relief was claimed in their respect and not withdrawn.
- CGT can be deferred if capital proceeds realised from any other asset disposal are invested in EIS shares, where the EIS investment was less than a year before the disposal, or less than three years after it. The relief is limited to the amount being invested into the EIS qualifying company.
- If an investor disposes of their EIS shares at a loss, that loss can be offset against capital gains in the year of disposal or income in the year of disposal or in the preceding year. This could potentially limit a total loss to 38.5% of any original investment, assuming that the investor pays income tax at 45%.
- EIS shares that have been held for at least two years at the time of death stand to attract full relief for Inheritance Tax purposes and their value would therefore not be chargeable to inheritance tax.
- UK resident non-UK domiciled individuals who claim the remittance basis can remit foreign untaxed income or gains to the UK to invest in EIS qualifying companies. This should normally be possible without triggering a UK tax charge on the funds being remitted to the UK.
While these tax reliefs are certainly appealing, investors need to be aware that there are qualifying rules for both individuals looking to invest, and for the sort of company you are allowed to invest in.
What are the qualifying conditions for investors?
The conditions relating to EIS are both complex and lengthy, here we focus on identifying the most pertinent qualifying conditions and criteria. However, it is not a substitute for expert advice on the legislation and its application.
Investors must meet the following criteria:
- The claimant must be a UK taxpayer.
- The investor must subscribe for newly issued shares for cash.
- The shares must be paid for in full by the date of issue.
- The investor’s interest (together with their associates) cannot exceed 30% of total share capital or have any form of controlling interest in the company.
- An individual may not be ‘connected’ (together with their associates) to the company. This means that, for the period two years before the issue of EIS shares, and for three years after the investment was made (or three years after the company starts trading, if that is later), the individual cannot be a paid company employee, partner, or director (although they may be an unpaid director, or possibly a paid ‘business angel’ investor); nor can they have more than a 30% interest in the company (i.e. 30% of the share capital, or voting rights, or the rights to assets) or any subsidiary.
- Investors who invest in small companies through a partnership structure are not eligible for EIS relief.
- If investors already hold shares in the company they are investing in, further criteria must be satisfied.
The investor must hold the shares for at least three years (and possibly up to five years, if the company began trading after the shares were issued). If an individual disposes of their shares within less than three years, any reliefs are likely to be clawed back.
Other key general qualifying conditions:
- Risk to capital condition – The ‘risk to capital’ condition means that entrepreneurs must demonstrate to HMRC and investors that there is a “significant risk” of a capital loss on their shares exceeding the “net investment return”.
- Purpose of the issue condition – this states that shares issues must be in order to raise money for the purpose of a qualifying business activity so as to promote business growth and development. Issuing arrangements cannot protect against ordinary risks of investment
What are the qualifying conditions for companies?
In order to be considered an eligible company for EIS, the criteria your company must meet include the following;
- The company must be a ‘small company’, and as such cannot have [net] assets of more than £15million before the shares are issued, or £16million immediately after.
- It must have fewer than 250 full-time employees.
- The company cannot be listed on the London Stock Exchange or any other recognised stock exchange – or have any intention of becoming listed – at the time the shares are issued (although the Alternative Investment Market (AIM) is not treated as a recognised market under EIS rules).
- While most trading companies qualify, there are a number of ‘excluded activities’ including property development, farming, coal and steel production, hotel and nursing home operation and management, and many financial activities.
- All capital raised by the issue of shares must be actively engaged in the qualifying business activity within two years of the shares being issued.
- The company must be trading in the qualifying activity for at least four months after the share issue before an investor is eligible for EIS relief.
The seven-year rule
If a company has been trading (i.e. from the point of the company’s first commercial sale) for more than 7 years and did not issue any of EIS, SEIS or VCT qualifying shares in that period, it does not qualify for EIS investment, unless the company raises EIS or VCT investment totalling a minimum of 50% of its five year average turnover and the purpose of funding is to enter a new product into the market or expand geographically.
The rules surrounding the EIS initiative can be quite complex, so it is important that you get expert advice about investing in such schemes as early as possible. But the rewards can be significant; for example, the cost of a £10,000 investment in an EIS could immediately be reduced to £7,000 (thanks to the Income Tax write off of 30% x £10,000) while still receiving £10,000 worth of shares. Add this to the other benefits and reliefs available, and the potential for the investment to increase in value, and it is easy to see why the extension to the sunset clause for EIS from 6 April 2025 to 6 April 2035 will be well received.
While EIS has increased in popularity significantly, so too has the expectations of investors. One such expectation of companies seeking to benefit from EIS investment is the securing of Advance Assurance; most sophisticated investors will not invest without this already being in place. Not to mention that by securing Advance Assurance in advance of promoting your investment opportunity to investors means that it will save you significant time once investment has been made.
Advanced Assurance is the process of seeking pre-approval from HMRC that confirms whether or not a company is a qualifying company for EIS purposes. While the process if valuable and, as we mention above, most investors will not invest without it – it does not guarantee that your investors will meet the conditions of the scheme.
Seed Enterprise Investment Scheme
Introduced in 2012, the Seed Enterprise Investment Scheme (SEIS) is the younger sibling of EIS. It was introduced to encourage investment in very high-risk and very early-stage businesses. Tax reliefs available to investors under SEIS are more generous than EIS in order to reflect the additional risk being taken through investing in earlier stage businesses.
While EIS offers income tax relief of 30%, under SEIS this increases to 50%. The other tax reliefs available including CGT exemption, loss relief and the ability to carry back are the same for both EIS and SEIS investments. This is with the exception that where EIS offers CGT deferral in respect of gains on other disposals, 50% of such gains stands to be permanently exempt under SEIS.
As of March 2023, companies seeking to raise SEIS investment can raise up to a maximum of £250,000 in the company’s lifetime, and investors can claim SEIS tax reliefs on investments up to £200,000 in a given tax year.
In order for a company to raise SEIS investment, it must fulfil, amongst other conditions, the following qualifying conditions:
- The company must have a gross asset value lower than £350,000 at the time of share issue.
- It must have few than 25 full-time employees.
- It must not have been trading for more than two years.
In addition, it must also meet the same additional qualifying conditions relating to ownership that is detailed for EIS.
There are more specific rules relating to companies issuing shares for an SEIS investment, therefore, whether you are a company or investor it is important to seek expert advice to ensure you understand the rules and qualifications appropriately.
To find out more about how we can help you with EIS and SEIS, you can contact our specialist tax advisors by filling in the form below.
This article was updated on 24 November 2023 reflecting current EIS and SEIS legislation at the time of writing.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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