WHAT IS EIS
Introduction to EIS
The Enterprise Investment Scheme (EIS) is designed to encourage investment into early-stage businesses.
First introduced by the UK Government in 1994, it offers investors significant tax reliefs for taking on the inherent risks associated with backing early-stage companies.
In 2022, the Government reinforced its commitment to the scheme to continue encouraging private investors to support early-stage businesses. At Oxford Capital, we have long championed the scheme and have pioneered fund investing via EIS since 1999.
HOW DOES EIS WORK?
Small businesses are vital to the UK economy and supporting their growth has been a key objective of successive governments. The EIS scheme helps to fill the so-called ‘equity gap’, providing a source of funding to early-stage companies that are too small to attract the attention of bigger investors and cannot borrow enough money to fund their expansion plans.
EIS investing makes it possible for people to own shares in these companies while offering UK taxpayers a range of tax advantages. EIS relief can be claimed on your tax return or by writing to HMRC.
THE KEY EIS TAX BENEFITS
Investing in EIS-qualifying companies brings UK taxpayers a range of tax advantages, dependent on individual circumstances.
The reliefs provide an initial incentive to invest, the potential for tax-free gains, and a cushion against the potential downside risks associated with investing in small companies.
Income Tax Relief
30% income tax relief (up to a maximum investment of £1m in the current tax year, plus ability to carry back to the previous tax year).
Unlimited Capital Gains Tax deferral for the life of the investment.
capital gains tax
Any capital gain is tax free, provided income tax relief has been given and not withdrawn.
Any loss (calculated after deducting the income tax relief) may be offset against taxable income or capital gains.
Inheritance Tax Relief
100% inheritance tax relief after two years (provided the investments are held at time of death).
Business Investment Relief
UK resident/non-domiciled investors can invest into EIS using offshore funds, without having to pay remittance tax charges.
EIS was created in 1994 to support early-stage companies to grow their businesses. Early-stage investing is high risk, so to make it as attractive as possible to investors, HMRC provides a multitude of tax reliefs for anyone who decides to invest in an EIS qualifying company.
Dependent on individual circumstances, EIS investors could benefit from tax reliefs including 30% income tax relief on invested capital, CGT deferral relief, CGT free gains, Inheritance Tax relief via Business Relief, and Loss Relief.
Each EIS provider has a minimum subscription figure. You can invest up to £1m per tax year into an EIS, and this figure doubles to £2m if the EIS is “Knowledge Intensive”. You can also backdate contributions to the previous tax year, so in effect, the annual maximum is £2m, or £4m for Knowledge Intensive schemes.
EIS shares are unquoted and cannot be sold in the same way as stock market-listed shares. EIS shares can only be sold when the company is sold either by trade sale or management buy-out or when it is listed via IPO (Initial Public Offering).
All gains generated by EIS qualifying shares are exempt from CGT so long as they have been held for the minimum 3-year holding period. This date can be found on page three of the EIS3 certificate, under “Termination Date”.
It typically takes 12-18 months to fully deploy an EIS investment, so tax reliefs will not be immediately available. Each relief is based on the shares of each company – not the overall portfolio, so tax relief timings will be staggered. The typical lifecycle of an EIS investment is 5-7 years. There are two key HMRC timings investors need to be aware of: A 3-year minimum holding period to maintain income tax relief and CGT free gains, and a 2-year minimum holding period to qualify for Business Relief.
An EIS is a high-risk investment, and investment returns cannot be guaranteed. Each EIS provider gives investors a target return. However, this is only for guidance. Although an EIS can generate returns that are significant multiples on the original investment amount, there is also the risk of total failure. Unlike traditional investments, HMRC offers a degree of downside protection via Loss Relief.
The objective of an EIS is to grow the value of a business, to make it as valuable as possible when the time comes to sell it. This means companies prefer to retain profits rather than pay out to investors. An EIS can pay dividends. However, these will be taxable, which makes it very unlikely for an EIS to pay a dividend.
Early-stage investing via EIS is high risk. Therefore, potential investors need to have the required risk appetite. In addition, they need to consider their capacity for loss (e.g. would a loss affect their standard of living?). Finally, the lack of liquidity needs to be considered. If an investor anticipates requiring access to the invested EIS funds within 5-7 years, then an EIS is likely to be an unsuitable investment.
Full investment risks are documented within the Information Memorandum and a more detailed summary can be found on the following link.
ACCESS EIS THROUGH OXFORD CAPITAL
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