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Are EIS a good investment?

Are EIS a good investment?

By Mark Bower-Easton |

Growth EIS Investments for beginners – learn everything you need to start as an investor

 

What is EIS eligible?

  • There are rules around EIS eligibility for both companies looking to raise capital, and investors looking to invest in EIS-qualifying companies. 
  • For companies, they need to adhere to HMRC’s qualification rules. These include operating in an allowable industry, being UK based, and not falling foul of other metrics such as the number of employees, gross assets, and annual and lifetime EIS fundraising limits. 
  • The money raised from each EIS qualifying funding round must be used to grow or develop the business. It must present an actual risk of loss of capital for the investor, not be used to buy all or part of another business and must be spent within 2 years of the investment date. 
  • For individual investors, they need to be a UK resident and need to be paying UK taxes. They cannot be connected to the companies they are investing in. This includes employees or directors of the company, investors (who with their associates) hold more than 30% of the company’s share capital, relatives of connected persons (with some exclusions), and business partners of connected parties. 

 

Benefits of EIS for investors:

  • There is a multitude of benefits for investors who decide to invest via EIS. They will gain access to early-stage businesses that are not available for investment elsewhere, with the potential for significant capital growth. 
  • Investing in early-stage businesses is high risk, so it’s not a form of investment that will be suitable for everyone. However, for those who are willing to accept Enterprise Investment Scheme risks, there are some significant tax advantages, such as:
    •  30% income tax relief on the amount invested. For every £1 invested into an eligible company, the investor will receive 30p income tax relief, which can be used to offset against their current tax year liability, previous tax year liability, or both.
    •  CGT-free gains. All gains from EIS shares are free from CGT, so long as they are held for at least three years. If the shares are sold within three years, the gain will be liable for CGT, and the initial income tax relief will be clawed back by HMRC. However, this is a rare occurrence, and only happens when it makes financial sense to do so (eg, the company receives an offer for purchase that is too good to turn down, even when factoring in the loss of tax reliefs)
    • CGT deferral relief. If an investor is looking to sell an asset, such as a second property or portfolio of shares, the gain will be liable for CGT. If the gain element is invested into an EIS, the gain can be deferred indefinitely. It is important to note that you may still need to pay the tax, and then reclaim it, particularly if the investor is selling a property, as current rules require CGT to be paid within 60 days of completion. 
    • Loss Relief. HMRC provides a safety net to all investors. The amount of Loss Relief available depends on the investor’s marginal rate of income tax. An additional rate taxpayer’s maximum loss will be 38.5% of invested capital.
    • Business Investment Relief. For UK resident, non-domiciled investors, it is possible to use offshore funds to invest in EIS, without having to pay the remittance tax charge. Upon successful exit, the investor is free to bring the gains into the UK with no liability to tax. The initial investment amount can either be taken back offshore or rolled over into a new EIS.
    • Inheritance Tax benefits via Business Relief. EIS shares qualify for Business Relief after a two-year holding period, meaning the value will fall outside of their estate for inheritance purposes, assuming the shares are still held at the point of death. Should the shares be sold, the value of the proceeds will be returned to the estate and be liable for IHT. However, if the proceeds are reinvested into an EIS, the investor will benefit from replacement relief, meaning that the shares will again fall outside of their estate, but without having to wait for the two-year qualifying period.

 

Do EIS schemes pay dividends?

  • EIS schemes can pay dividends, but typically they don’t. There are two reasons for this – dividends paid via an EIS-qualifying company are taxable, and as the main focus of the best EIS funds is on growing the value of the business and achieving as profitable business as possible, it makes sense to retain revenue and profit, rather than distributing it.

 

What happens if an EIS company goes bust?

  • One of the major tax benefits of investing in an EIS-qualifying business is something called Loss Relief. Loss Relief is essentially a safety net, provided by HMRC, to ensure that there is an element of downside protection, should one of the companies fail. The amount you can claim is dependent on the investor’s income tax status and the rate at the time of the loss, and the loss can be offset either against income tax or Capital Gains Tax. For an additional rate taxpayer, the maximum loss that can be incurred is 38.5% of the invested amount. If a company goes bust within the first three years, Loss Relief is still applicable, and you will not need to repay the initial 30% income tax relief already provided at outset.

Awards

  • BEST EIS
    FUND MANAGER
    2013,2012,2010 AND 2006

  • VENTURE CAPITAL
    HOUSE OF THE YEAR
    WINNER 2013 AND 2005

  • MOST IMPACTFUL
    INVESTMENT
    WINNER 2017

  • BEST ANGEL
    SYNDICATE
    WINNER 2018

  • BVCA Excellence in ESG
    GP CATEGORY
    COMMENDED 2020

  • VC INVESTOR OF THE YEAR
    GIANT HEALTH AWARDS
    WINNER 2020

  • EXIT OF THE YEAR
    ONE TO WATCH
    2020

  •            

    EXIT OF THE YEAR 2021 (FINALIST)UK BAA AWARDS