What does your client need to know about the Enterprise Investment Scheme?

What is the EIS?

The Enterprise Investment Scheme (EIS) is a government initiative created to spur investment in smaller, emerging businesses.

Its main goal is to support companies that might not yet have the scale or track record to attract traditional funding.

Essentially, EIS makes it easier for investors to back innovative startups and small businesses by offering attractive tax reliefs.

Think of the Enterprise Investment Scheme as a win-win. It helps businesses get the funding they need to grow, and it offers investors enticing incentives to take the plunge.

By making these investments more appealing through tax benefits, the EIS plays a crucial role in driving economic innovation and growth.

How does the EIS work?

The Enterprise Investment Scheme operates by providing significant tax relief to individuals who invest in qualifying small companies.

Investors purchase shares in a company that qualifies under the EIS criteria. This is usually a small or start-up business that needs capital to grow. Investors can then claim various tax reliefs on their investments, which can significantly reduce their tax bills.

If the business thrives and increases in value, investors stand to benefit from the potential capital growth of their shares.

Consider this example: John decides to invest £20,000 in a promising new tech company through the EIS.

He can claim 30% EIS tax relief, reducing his tax bill by £6,000. If the tech company performs well and John’s shares increase in value, he could see substantial returns.

Plus, if John holds onto his shares for at least three years, he can benefit from capital gains tax relief on any profit he makes when he eventually sells them.

What business qualifies for EIS?

The Enterprise Investment Scheme is primarily aimed at new and expanding businesses.

This focus is intentional, as newer businesses often face significant challenges in securing the funds they need to facilitate growth.

By targeting these smaller, emerging companies, EIS helps foster innovation and supports entrepreneurial ventures.

What is the EIS qualifying criteria?

To benefit from the Enterprise Investment Scheme, businesses must meet specific criteria. Here’s a rundown of what’s required:

Must be trading & cannot be listed on the stock exchange

This rule ensures that EIS funding supports private, high-risk businesses rather than large, established public companies.

Not be in one of the specified excluded industries

The EIS scheme does not support certain industries and activities. This is to ensure that the scheme focuses on more innovative and growth-oriented businesses. 

Be less than seven years since their first commercial sale

This rule ensures that EIS supports relatively young businesses that are still in their early stages of growth.

Employ fewer than 250 people 

This size restriction is designed to target smaller businesses, which often need more investment and support.

Have less than £15 million in gross assets

This limit helps ensure that EIS funds are used to support smaller companies rather than larger firms that might have more access to other sources of capital.

What are the rules for fund expenditure?

When a business raises funds through the Enterprise Investment Scheme, there are specific rules governing how the money can be used:

• The funds must be used to grow or develop the business. 
• The investment must present a genuine risk of capital loss for the investor. 
• EIS funds cannot be used to purchase all or part of an existing business.
• The money must be spent within two years of the investment or the date the business started trading if that is later. 

Why invest through EIS?

Investing through the Enterprise Investment Scheme offers several compelling benefits:

• The scheme provides significant tax relief, making it a financially attractive option.
• Investing through EIS allows you to support and be part of innovative and cutting-edge developments.
• EIS provides a way to diversify your investment portfolio with high-risk, high-reward opportunities.
• Investing in promising startups and small businesses can offer substantial returns if these companies succeed.

How do clients invest in EIS?

Clients have two primary routes for investing in EIS:

Direct investment

Clients can directly invest in qualifying companies.

This route offers more control over the investment but requires a thorough understanding of the companies and their potential.

Financial adviser, accountant, or specialist EIS manager 

Alternatively, clients can choose to invest through a financial adviser, accountant, or a specialist Enterprise Investment Scheme manager.

These professionals provide expert guidance and manage the investment process, which can be beneficial for those who prefer not to navigate the complexities on their own.

What should clients know before investing in EIS?

Before opting for EIS investments, clients should consider the following:

• EIS investments are high-risk and can result in the loss of capital. It’s crucial to be aware of and comfortable with this risk.
• Investments in EIS-eligible companies are typically illiquid, meaning they may be difficult to sell or access for several years.
• Proper research and due diligence are essential before committing to an EIS investment.
• EIS investments may not suit everyone, but they are generally better suited for investors with a high-risk tolerance.

EIS tax relief for investors: what is available?

There are several EIS tax relief options to make the investment more appealing.

EIS tax relief for investors are as follows:

Income Tax 

Investors can claim up to 30% income tax relief on their investment. For example, a £10,000 investment could reduce an investor’s tax bill by £3,000.

Capital gains tax

Investors are exempt from capital gains tax on any profits from the sale of EIS shares if they have held the shares for at least three years.

Business property relief

EIS investments qualify for business property relief, which can be advantageous for inheritance tax planning.

Loss relief

If an EIS investment results in a loss, investors can claim loss relief, allowing them to offset the loss against their income tax bill.

These relief options highlight the benefits of the Enterprise Investment scheme tax relief, making it an attractive choice for savvy investors.

Want to work with Unbiased?

The Enterprise Investment Scheme offers a powerful way to invest in innovative, high-potential businesses while benefiting from significant tax reliefs.

By understanding the criteria, fund expenditure rules, and tax benefits, financial advisers can help clients navigate this valuable scheme effectively.

With the right guidance, EIS can be a strategic tool for both supporting new businesses and achieving attractive financial returns.

Let Unbiased Pro help you grow your firm by matching you with your ideal clients, ensuring you connect with individuals who are actively seeking expert advice on navigating schemes like EIS.