What is EIS?

30% under EIS. Possibility to carry back the relief to the previous tax year. You can invest up to £2,000,000 per year under SEIS and receive up to £600,000 in tax relief.

Provided shares are held for at least three years, you will pay no capital gains tax on any profits you make from the sale of EIS shares.

If you make a loss on an EIS investment, you can offset that loss against your income tax at your marginal tax rate.

There is no inheritance tax to pay on shares bought through EIS as long as they have been held for at least two years.

EIS allows you to defer a capital gain.

UK residents who are non-UK domiciled can invest via EIS and bring in overseas capital without a UK tax charge.

In the early 1990s, the UK was recovering from a recession, grappling with high unemployment rates and sluggish economic growth. To combat these challenges and stimulate the economy, the government introduced the Enterprise Investment Scheme (EIS) in 1994. EIS was designed to encourage investments in small, high-risk companies by offering significant tax reliefs to investors, thus supporting businesses that might otherwise struggle to secure funding.

Initially, EIS provided a 20% income tax relief, which has since increased to 30%, making it a more attractive proposition for investors. The scheme also offered capital gains tax relief and loss relief, further reducing the financial risk for investors. Unlike SEIS, EIS was targeted at slightly larger companies, allowing firms with up to 250 employees and £15 million in assets to qualify.

Over the years, EIS has been amended and expanded to better serve the evolving needs of businesses and investors. For instance, in 2012, the same year SEIS was launched, the government increased the maximum investment limit and expanded the range of qualifying trades. These changes aimed to make EIS more flexible and accessible.

EIS has played a pivotal role in the UK's economic landscape, channelling billions into thousands of companies. By the end of the 2021-2022 financial year, EIS had helped approximately 31,365 companies raise over £24 billion. The scheme's impact is particularly notable in sectors like technology and healthcare, where it has supported numerous innovative startups and scale-ups.

While EIS has generally been well-received, it has faced scrutiny over its complexity and the potential for abuse. Nevertheless, the government has continued to iterate on the scheme, striking a balance between encouraging investment and ensuring fiscal responsibility.

EIS has significantly contributed to job creation and economic growth across the UK, particularly in regions with strong entrepreneurial ecosystems. By enabling more people to invest in small companies, EIS has not only helped businesses thrive but has also democratised investment in the UK. Despite the challenges and criticisms, EIS remains a cornerstone of the UK's strategy to foster innovation and support small businesses.

Angel Investors, often known as Direct Investors, allocate funds directly into startups. This approach requires you to identify, decide on, and manage investments personally. It is suited for individuals with the necessary time, access, and expertise to pinpoint and oversee potential successes. Being an Angel Investor is an active role, requiring your direct involvement.

Investors in funds entrust their capital to the expertise and networks of SEIS & EIS Fund managers. By pooling your resources with those of other investors, the Fund invests in a portfolio of startups on your behalf. This method offers diversified investment, mitigates risk, and provides access to high-quality startups, which may be beyond the reach of most Direct or Angel investors.

One of the most important things to do after the investment in either a company or a fund is to claim your tax relief. When investing through a fund, the fund manager will provide the EIS3 forms necessary for tax relief claims. When investing directly, the companies will supply these.

Once the EIS3 certificates are available, you will be able to claim your tax relief from HMRC as part of your self-assessment tax return. If you wish, you can carry your tax relief to the previous tax year as well. We recommend that you seek professional advice if you are unsure of your personal circumstances. Tax benefits are subject to individual circumstances. Subject to changes.

• For more information, check out our Investor Post-Investment Guide.

After investing through a fund, the fund manager will provide the EIS3 form necessary for tax relief claims.

Steps include:

• Safely storing EIS3 certificates.
• Completing the self-assessment tax return.
• Providing evidence of the investment.
• Submitting the tax return on time.

Details required for the tax return include Unique Investment Reference, investee company name, investment amount, date of share issue, and potentially the EIS3 forms.

It can usually take between 5 days and 8 weeks to receive the tax refund in your accounts.

Another important option to keep in mind is the carry back option. Under EIS, you are able to backdate some EIS investments to the preceding tax year.

For queries, contact HM Revenue & Customs.

Set up a system to track your investments. Many funds offer portals for easy access to investment overviews, valuations, and company reports. Remember, early-stage startups may take time to show significant returns due to initial heavy investments in product development.

• Investment Decision: Choosing between direct investment or a diversified fund.
• Compliance for direct investment: Ensuring the investment meets HMRC’s EIS criteria.
• Share Issuance: Receiving shares in the companies.

• EIS3 Form: Receiving and filing this form for claiming the tax relief.
• Tax Relief: Claiming EIS tax relief through the HMRC self-assessment form.
• Monitoring & Exit: Especially if you’re investing directly into startups, it’s important to monitor their performance and identify exit opportunities. For fund investors, the fund manager will do this for you.

EIS carry back allows investors to apply a portion of their investment against their income tax bill in the previous tax year, potentially reducing the amount of tax they owe.

SEIS is designed for investing in very early-stage companies, offering higher tax reliefs to reflect the increased risk, while EIS is for more established businesses. The right choice depends on your risk tolerance and the stage of businesses you're interested in.

A business can qualify for both SEIS and EIS by first raising funds under SEIS to the maximum allowance and then moving on to EIS for subsequent funding rounds, subject to meeting specific conditions for each scheme.

Ineligible sectors for EIS include finance, property development, and legal services, among others, due to their non-qualifying business activities.

Potential risks for investors include the loss of capital, liquidity risk (difficulty in selling shares), and the risk of losing tax relief if the company or investor fails to comply with the schemes' conditions.

Rules for spending EIS funds require that the investment is used for qualifying business activities, such as development or expansion, within specific time limits.

The timeline for using EIS investment is generally within 3 years for EIS, to support growth and development activities.

Exit strategy restrictions under EIS include maintaining the investment for a minimum of three years to retain tax reliefs, with few specific restrictions on the form of exit.

Selling SEIS or EIS shares can be done after holding them for a minimum of three years, and any gain may be exempt from capital gains tax if all conditions are met.

Using SEIS and EIS with other funding is possible, but care must be taken to ensure compliance with the schemes' conditions, especially regarding the ownership and independence of the company.

If a company becomes ineligible after investment, investors may lose their tax relief, although this depends on the timing and reasons for the ineligibility.

Claiming both SEIS and EIS in the same year is possible, provided the investor has not exceeded the annual investment limits for each scheme and the investments meet all other conditions.

Common reasons for failing to qualify include exceeding the asset or employee limits, conducting disallowed activities, or not planning to spend the funds on qualifying business activities.

Applying for SEIS and EIS involves the entrepreneur submitting an application to HMRC to receive advance assurance, which helps attract investors by confirming the company's eligibility.