The Enterprise Investment Scheme (‘EIS’) is a tax relief scheme introduced by the Government to encourage investment in start-up & early stage businesses. Through providing tax reliefs the scheme is attractive to investors, therefore making it easier for companies to raise funds in order to grow and develop their business.
What are the benefits for investors?
EIS is beneficial for individual investors as it provides them with 30% tax relief on the amount invested, up to £1m a year. Investors also have a capital gains tax exemption when selling the shares, if they meet the relevant criteria. An exemption from inheritance tax could also be available for investors, provided they have held the shares for at least 2 years, and they meet certain conditions at the point of transfer. If investors have held the shares for more than 3 years and a loss is generated from the sale of shares, then the investors can choose to claim loss relief against their income or offset the loss against future capital gains.
Key facts for investors
- EIS shares must be paid for in cash in order to be eligible. They cannot be allotted in return for services
- To be an eligible investor you must not be an employee or paid director, other than receiving permitted payments. You, along with your associates, must also hold less than 30% of the shareholding & voting rights in the Company. Associates are business partners, spouses & lineal relatives, but this does not include siblings
- Investors can only invest £1m across all companies within each tax year
- Investors are eligible for a capital gains tax exemption when selling their shares, provided they have held the shares for at least 3 years & claimed the full income tax relief on the amount invested
- You can carry back the EIS income tax relief by a year (e.g. if you received EIS shares in the 2019/20 tax year you can carry back the income tax relief to the 2018/19 tax year)
Key facts for companies
- Companies can raise up to £5m in any 12-month period under EIS
- The lifetime limit for EIS investments for companies is £12m
- The company or group must have less than £15m gross assets & fewer than 250 employees at the point of investment, in order to be eligible
- Companies must conduct a qualifying trade. Some excluded trades are; legal & financial services, leasing, property development, farming & hotels. If the company partially conducts a non-qualifying trade, then this must equate to less than 20% of the activities of the trade as a whole. This will also apply to group companies
- Companies must receive an investment within the 7 year ‘initial investing period’ in order to continue to receive investments, up to the lifetime limit. If investments are received outside of this period, the amount invested must equate to at least 50% of the company’s five-year average annual turnover and be used for a new product market or geographical market
Knowledge intensive companies
Knowledge intensive companies are provided with greater thresholds for EIS investments, these include:
- Being able to raise up to £10m in any 12-month period
- The lifetime limit is increased to £20m
- The company and group must have less than 500 full-time employees
- A 10 year ‘initial investing period’
In order to qualify as a knowledge intensive company, you must meet the following criteria:
- Carry out work to create intellectual property with the majority of your business coming from this within the next 10 years
- Have at least 20% of employees carrying out research and development for the 3 years from the date of investment. The employees must be in a role that requires a Masters or higher degree
- Spend 10% a year of your overall operating costs on research and development, for the 3 years following the date of investment. Alternatively, you can spend 15% in one of the 3 years
If you would like to find out more about Enterprise Investment Schemes, please do get in touch with the team at DRG Chartered Accountants. We would be delighted to hear from you.