Introduction to the Enterprise Investment Scheme (EIS)

28 July 2021

5 minute read

The EIS provides investors with incentives to support new, innovative and high-risk companies. Find out how it impacts you.

Introduced in 1994, the Enterprise Investment Scheme (EIS) is now a major source of funding for young British businesses. The EIS provides investors with incentives to support new, innovative and high risk companies. With the EIS becoming increasingly popular, could it be a difference maker to your portfolio and the wider economy?

Mike Romatowski, Barclays Wealth Planner, considers the EIS below.

What is the EIS?

The government backed EIS enables qualifying companies to raise funds to support their development and growth. As young businesses carry higher levels of risk, the EIS incentivises investors with attractive tax reliefs. EIS qualifying companies are typically (i) small, (ii) unlisted (and thus illiquid), (iii) high risk and (iv) strongly linked with the UK.

What types of companies qualify under the EIS?

To raise money under the EIS, a company must meet a number of specific criteria. Qualifying companies need to have a permanent establish in the UK and carry out a ‘qualifying trade’. The following table includes some (but not all) of the other key conditions a company must meet to qualify under the EIS:

Maximum Number of Employees1 250
Maximum Number of Gross Assets2 £15,000,000
Can It Be Listed on a Recognised Exchange No
Maximum Age of Company at Time of Raising Funds3 No more than 7 years

1. This increases to 500 employees if the company is ‘Knowledge Intensive’.

2. Gross assets must not exceed £15,000,000 prior to the issuance of shares and must not exceed £16,000,000 after the issuance of shares.

3. This increases to no more than 10 years if the company is ‘Knowledge Intensive’.

Very simply, EIS qualifying companies are (i) small, (ii) unlisted (and thus illiquid), (iii) high risk and (iv) strongly linked with the UK.

Benefits of the EIS

Though EIS investments are high risk, they can potentially provide added diversification by exposing investors to new and small businesses, as well as innovative and potentially burgeoning industries, to which their portfolio is unlikely to already have exposure. Additionally, EIS investments can potentially create opportunity for a portfolio, allowing investors to buy into exciting businesses early in the growth curve (of course, many of these businesses could fail to grow or fail entirely).

Care should be taken to avoid allocating too much capital to such high risk investments, but for some investors the potential for capital growth is attractive. To entice investors and help cushion downside risk, EIS investments carry tax incentives. The table below summarises these main incentives:

Rate of Income Tax Relief1 Up to 30%
Ability to Carry Back Investment to Previous Tax Year to Obtain Income Tax Relief in Previous Year Yes
Minimum Holding Period for Key Reliefs 3 Years
Loss Relief Available2 Yes
Exempt from CGT on Disposal Only if held for three years and income tax relief received on subscription and not subsequently withdrawn
CGT Deferral Relief Yes
CGT Reinvestment Relief No
Business Relief After 2 Years3 Yes
Investment Limit Per Tax Year Per Investor4 £1,000,000

1. Up to 30% income tax relief as a tax reducer (i.e. the relief is used to offset income tax payable).

2. Income tax (or Capital Gains Tax [CGT]) relief is available should an EIS investment go bust or be sold at a net loss.

3. EIS shares held for at least 2 years before death may qualify for full Inheritance Tax relief under Business Relief rules.

4. This increases to £2,000,000 if investing in ‘Knowledge Intensive’ companies.

There is a relationship between risk and reward, so it is possible that an EIS investment could perform well relative to more cautious investments. Those with high incomes, appetite for risk and capacity for loss may find the risks acceptable due to the available reliefs and potential for growth.

How does the EIS help the UK as a whole?

It is easy to focus on the EIS as being for private investors. According to HMRC, in the 2018/19 tax year over 34,000 investors made EIS investments. However, there is an encouraging story about how the EIS can benefit the wider UK economy.

At its core, the purpose of the EIS is to get money into small British businesses, drive growth and create jobs. According to HMRC, between the launch of the EIS in 1993/94 and the 2018/19 tax year, over 31,000 companies have made use of the EIS, raising over £22 billion.

Gousto serves as a great example of how the EIS can create real opportunity. Gousto is the UK’s leader in meal kit deliveries. Not long after being founded (in 2012), Gousto received its first EIS financing in 2013, now employing more than 900 people and is valued at over $1 billion USD (as of January 2021).

For every Gousto, there are many examples of where things have not worked out. However, with 900 jobs created, Gousto is a prime example of how the EIS can help create opportunities in the UK for investors, the government and the public.

Risks and drawbacks of the EIS

The high risk nature of small and young companies means that the EIS itself is a high risk vehicle. There is a high probability that an EIS qualifying investment will fail. Additionally, EIS investments are illiquid, meaning you are unlikely to be able to sell your investment easily (and if using a professional EIS manager, you are unlikely to have any control as to when an investment is sold).

Whilst the EIS carries attractive tax reliefs and the opportunity for substantial capital growth, successful EIS companies are not the norm. With this in mind, it is important to remember that the favourable tax treatments afforded to these types of investments are there in part to counter the additional risks associated with investing in unquoted companies.

In order to qualify as an EIS, a company must be approved by HMRC. To obtain such approval, the company must satisfy a number of requirements imposed by HMRC. If the company fails to meet the ongoing qualifying requirements, this could result in adverse tax consequences for investors, including being required to repay the 30% income tax relief.

EIS investment opportunities

To avoid the need to personally identify, scrutinise and value quality small companies, many investors utilise professional EIS managers. EIS managers will identify a number of opportunities and handle the purchase and sale of EIS shares on your behalf. As these managers carry out a specialised function, their fees are typically higher than more traditional ‘collective’ investments.

Through our rigorous due diligence process, Barclays Wealth Management has identified what we believe is a diverse and best in class panel of EIS managers. If you believe the EIS is right for you and that it could be a difference maker for your portfolio, contact your Barclays Wealth Planner.

Next steps

Speak to your Wealth Manager or contact us if you would like to arrange a meeting with a Wealth Planner to discuss your options.

Your Wealth Planner can help you understand the effect of tax on your wealth and offer tax-efficient wrappers for your investments. They’ll be able to guide you towards making the right decision for your financial planning needs. Your planner can't offer tax advice – you should seek that independently. Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances.

This article does not constitute personal financial, tax or legal advice. Each person’s circumstances are different so if you are unsure about investing, you should seek advice from a regulated adviser.

Things to consider

The value of investments can fall as well as rise. You may get back less than what you originally invested.

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