The UK market has witnessed a remarkable transformation in recent years with the emergence of the Enterprise Investment Scheme. Almost 4500 companies raised £2,305 million of funds under the EIS scheme in the tax year 2021-22.
This innovative investment opportunity has quickly become a tangible and enticing prospect for investors looking to diversify their portfolios and tap into the potential of burgeoning startups.
However, beneath the surface of this promising endeavour lies a complex web of regulations and considerations that prospective investors must navigate.
In this article, drawing upon our extensive industry experience and expertise, we will guide you through the intricacies of EIS investments. Our guide to EIS will provide essential insights to help you make informed decisions regarding tax-efficient investing as an investor.
What Is EIS And How Does It Work?
The Enterprise Investment Scheme (EIS) is a government-backed initiative in the United Kingdom to encourage investment in small, high-risk businesses.
It’s tailored for individual investors looking to support startups and growing companies while enjoying significant tax benefits.
So, how does EIS work? Essentially, when you invest in an EIS-eligible company, you’re injecting capital into its growth in exchange for shares. These shares, however, come with a range of tax incentives.
You can claim income tax relief on a portion of your investment, mitigate capital gains tax on potential profits, and even protect your investment from inheritance tax under certain conditions.
Therefore, EIS offers a way to back promising enterprises and provides a tax-efficient avenue, making it an attractive prospect for savvy investors.
What Kind Of Investors Are Eligible For The EIS
Understanding the Enterprise Investment Scheme (EIS) ensures familiarity with the eligibility criteria governing investors and the companies seeking investment.
These rules serve as the fundamental framework, ensuring that EIS investments are directed towards startups and high-growth businesses requiring support while providing investors valuable tax incentives. Let’s explore some EIS rules for both sets of players:
EIS Rules For Investors
The investor must be a UK taxpayer to qualify for EIS. Under the plan, individuals may invest up to £1 million every tax year. They must not be currently working for the firm at the time of investing.
After shares have been granted, an investor may often become a director of the firm. In most cases, for this post to be eligible for EIS tax reduction, it must be unpaid.
An EIS investor cannot hold a liquidation preference if they own more than 30% of the company’s total shares. However, because of this loophole, the investor may request that you issue Class A Ordinary Shares to give them precedence.
Tax Advantages For Investors Using EIS
The following are some of the tax benefits that EIS investors enjoy:
- Investors can enjoy a 30% income tax reduction on their EIS investment.
- This tax relief can be carried back to the previous tax year for added flexibility.
- If an EIS company fails, investors can offset a portion of their initial investment against current tax liability.
- Investors can defer capital gains tax by reinvesting gains in EIS-qualifying shares.
- Hold EIS investments for at least three years to avoid capital gains tax on any profits.
- Early withdrawal allows reinvestment of funds into another EIS-eligible venture.
- EIS shares qualify as “relevant business property,” providing potential full Inheritance Tax relief.
- After two years, EIS shares may qualify for 100% Business Property Relief. Some Risks of EIS Investments that Investors Should Be Aware of While EIS investments offer enticing benefits, investors must consider potential risks.
- High Risk of Business Failure – Many EIS-qualifying companies are early-stage startups or small businesses with unproven track records. Their success is uncertain, and investors must be prepared for the possibility of business failure. In such cases, investors may lose their entire capital, and the promised tax benefits may not offset these losses.
- Lack of Liquidity – EIS investments are typically illiquid, meaning there may be limited opportunities to sell your shares or exit your investment before the stipulated minimum holding period, usually three years. This lack of liquidity can tie up your capital and restrict your ability to access funds when needed.
- Tax Rule Changes – The UK government can modify EIS tax incentives and regulations over time. While the scheme currently offers attractive tax benefits, there is always a risk that changes in government policy could impact the overall appeal of EIS investments. Investors should stay informed about potential regulatory shifts.
Considering Investing In EIS Companies?
Investing in EIS companies offers a tax-efficient pathway to support promising startups and potentially reap substantial benefits in the future.
However, navigating the legalities and intricacies of EIS requires expertise. That’s where an EIS investment platform can be incredibly efficient, as they offer expertly vetted investment opportunities and support.
An investment management firm offering EIS investments can help you gain invaluable insights, streamline the investment process, and ensure that you make informed decisions.
They will assist with all the necessary paperwork and provide ongoing support, making your journey into EIS investments smooth and rewarding.
