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The Enterprise Investment Scheme (EIS) is a government-backed venture capital scheme, introduced in the UK in 1994 with one core purpose: to encourage private investment into high-growth, early-stage businesses through the provision of a generous range of investor tax reliefs.
Over the course of the past three decades, the EIS has achieved exactly that. Raising over £25 billion of private investment into more than 32,000 UK startups and scaleups, the EIS has cultivated a portfolio of success stories year-on-year, from property comparison platform Zoopla to global threat intelligence provider Intelligence Fusion.
But it isn't just the EIS’ revered library of tax reliefs that have made the scheme so popular. From portfolio diversification benefits to enhanced incentives when planning for later life, a number of factors have made and continue to make the EIS an attractive scheme for UK investors - 10 of which every investor should be aware of.
1. Investors can generate potentially significant returns
2. Immediate income tax relief can be claimed on investments
3. All returns are capital gains tax-free
4. Investments can form an effectively diversified VC portfolio
5. Shares are passed on free of inheritance tax
6. Any UK taxpayer can access the scheme
7. Investors can defer existing capital gains tax liabilities using the scheme
8. Investors can access the alternative investment market
9. Risk can be further mitigated with loss relief
10. Investments can generate measurable, positive social impact
1. Investors can generate potentially significant returns
With EIS qualifying criteria stating companies must not have been trading for more than seven years and have a maximum of 250 employees at the time of investment (among other rules), EIS investments are inherently made into businesses in the early stages of their growth journey.
Being in such an early stage reflects the more aspirational rates of growth EIS opportunities tend to target when compared with alternatives such as mature private equity deals, targeting larger and often more ambitious trajectories for company growth, valuation and with it, investor returns.
2. Immediate income tax relief can be claimed on investments
Alongside its potential growth benefits, the EIS offers investors a generous range of tax reliefs that serve to minimise the risks and maximise the returns associated with early-stage investments, perhaps the most well-renowned of which is the scheme’s 30% income tax relief on the value of an investment.
Allowing investors to claim almost a third of the value of their investment back in income tax relief (should they have accrued sufficient income tax liabilities) once the round has concluded, this relief immediately erases a considerable proportion of the risk associated with the capital invested.
This can be particularly attractive for high net-worth investors, with a maximum of £300,000 (or £600,000 for investments into knowledge-intensive companies [KICs]) able to be claimed back in income tax relief per year through EIS investments.
The scheme also provides considerable flexibility on when this relief is able to be claimed, offering investors the opportunity to instead claim income tax relief up to five years after the investment was made, or even the year prior through the EIS’s carry-back facility should that be better suited to the investor’s tax situation.
3. All returns are capital gains tax-free
Another headline tax advantage offered to UK investors is the EIS’s full capital gains tax (CGT) exemption, which means any gains investors realise in the value of their shares are entirely capital gains tax-free upon the point of disposal.
Negating the UK CGT rate of 10% for basic rate taxpayers (18% in the case of property sales) and 20% for higher/additional rate taxpayers (28% in the case of property sales) that is usually due to be paid upon the point of disposal of assets, this advantage provides investors with an opportunity to generate considerable tax-free growth over time and further maximise potential net returns.
4. Investments can form an effectively diversified VC portfolio
With EIS-eligible companies existing across a broad range of sectors and geographies throughout the UK, and each startup possessing its own level of target growth and exit plan, naturally, the scheme lends itself as a powerful tool when crafting a diversified investment portfolio with a clear strategy and personal mission.
Allowing for a calculated spread of capital across industry, specialisation, management styles and business maturity (up to a maximum of seven years), the diverse nature of EIS opportunities can prove a powerful tool for investors seeking to achieve a balanced venture capital portfolio that accurately reflects their growth goals, portfolio strategy and personal mission.
5. Shares are passed on free of inheritance tax
A particularly attractive tool for individuals planning for later life, the inheritance tax (IHT) exemption allows investors to pass on EIS-eligible shares free of the usual 40% IHT deduction due on UK estates valued over the £325,000 nil-rate band (that rises to £500,000 should £175,000 of that include the value of a residency).
Though shares must have been held for at least two years to qualify for this exemption, for investors with particularly substantial estates keen to maximise the proportion of their assets passed onto their intended beneficiaries, this feature can prove a powerful advantage that other tax-efficient routes including VCTs and ISAs do not boast.
6. Any UK taxpayer can access the scheme
Whilst the scheme can be particularly attractive to high net worth individuals and more experienced investors due to the considerable tax reliefs and higher risk/return profile it boasts, anyone who is a UK resident (or that claims UK tax liabilities) can invest using the EIS.
Though technically any UK taxpayer is able to invest via the EIS, it is worth taking into consideration that minimum investment amounts can not only vary from opportunity to opportunity but from provider to provider if utilising a co-investment platform. Consequently, ensuring a co-investment platform’s minimum requirements can be met prior to the consideration of any opportunity is key.
7. Investors can defer existing capital gains tax liabilities using the scheme
One of the lesser known, but perhaps most advantageous, of the EIS’s tax reliefs, EIS deferral relief gives an investor the option to defer payment of CGT that they have accrued from the disposal of any other asset (external to the EIS, which is, of course, CGT-exempt), providing the gain’s value is invested into EIS-eligible shares.
This means that investors can treat gains that they have already acquired from share sales, property sales, or any other chargeable asset, as though they had been acquired in future years, offering investors the flexibility to structure their tax liabilities to make the best use of annual tax allowances and personal circumstances.
8. Investors can access the alternative investment market
Categorised as an alternative investment, venture capital (the asset class for which the EIS is classified) does not fall under the three traditional asset classes of stocks, bonds and cash, and in turn, can be associated with a number of significant investor advantages.
Alongside being less correlated to stock market fluctuations than their traditional counterparts (in the EIS’s case due to its link with unlisted companies), alternative investments by nature also offer a considerably broader scope for diversification and can be inherently less volatile to external fiscal events such as rapid inflation.
Given recent stock market volatility and the ever-increasing pressure on UK investors’ capital as a result of soaring inflation, the appeal of the alternative investment market as a result of such qualities is among its highest - as is the EIS.
9. Risk can be further mitigated with loss relief
When investing in any early-stage company, the risks to capital should always be considered and accounted for, and where this is no different in the case of EIS investments, the reduction in risk EIS loss relief (alongside the addition of the EIS’s aforementioned library of reliefs) has the ability to facilitate can reduce a significant proportion of this downside should an unexpected event arise.
Available to claim should an investor realise a loss on the value of their investment, EIS loss relief allows investors to reduce their effective loss by claiming further tax relief at their marginal rate of income tax or capital gains tax (dependent on which route is preferable to the investor).
10. Investments can generate measurable, positive social impact
Encouraging private investment into some of the UK’s most transformational, impact-driven startups and scaleups, a key draw of investing in the Enterprise Investment Scheme has long been its ability to balance significant target returns with positive long-term impact within an investor’s portfolio.
Fuelling growth where it’s required most, injecting innovation into the UK’s dynamic startup space and contributing positively to the economy through factors from job creation to overall tax contributions, the EIS gives investors the platform to create real, measurable positive change that can be equally beneficial financially.
What’s more, those that invest into knowledge-intensive companies (companies that are carrying out research, development or innovation at the time that they are issuing shares) can benefit from extended allowances that include double the maximum annual EIS investment allowance to £2 million per financial year, propelling potential growth and subsequent impacts further.
A powerful venture capital investment tool
Whether it constitutes a considerable proportion of an investor’s venture capital portfolio or is instead utilised more sporadically to assist with mitigating and reorganising arising tax liabilities, the EIS investment opportunities have the potential to play a role in many an investor’s portfolio.
Though a scheme becoming increasingly popular amongst the UK’s experienced and high net worth investor space especially, the EIS is still largely unknown to many who could benefit considerably from it.
Should you wish to learn more about the Enterprise Investment Scheme, you can download our free EIS guide below to discover an end-to-end overview of the scheme, an in-depth explanation of each of its tax reliefs, and answers to the most frequently asked questions surrounding one of the UK’s most popular venture capital tools.
