Enterprise Investment Scheme: how it works and what tax relief is available 

If you own a company hoping to raise capital and expand while offering investors tax relief, the Enterprise Investment Scheme may be worth considering. 

We explore how the scheme works, eligibility and what you need to know about the tax relief available. 

What is the Enterprise Investment Scheme? 

The EIS is a venture capital scheme that offers tax relief to individual investors who purchase new shares in your company. 

As a result, the EIS can make your company more appealing to investors, helping you raise money you can then use to expand your business. 

Under this scheme, you can raise up to £5 million each year. This is capped at a maximum of £12 million during the lifetime of your company.  

These limits apply to what you receive from other venture capital schemes, such as venture capital trusts, Seed Enterprise Investment Scheme, and Social Investment Tax Relief, when the initial investment is within seven years of your firm’s first commercial sale.  

You should ensure you are eligible for the EIS and follow the rules. If you don’t follow EIS rules for at least three years after the initial investment, tax relief can be withheld or withdrawn from investors.  

It’s worth consulting a qualified financial adviser before getting involved in the Enterprise Investment Scheme to ensure you’re complying with all the rules.  

What companies qualify for the Enterprise Investment Scheme? 

There are many criteria your company must meet to be eligible for the EIS. 

Companies using EIS are typically small, early-stage businesses targeting high growth, which means their shares can be high risk.  

Your company must: 

• Have a permanent establishment in the UK. 

• Not control another company except for qualifying subsidiaries. 

• Not trade on a recognised stock exchange at the time of the share issue and not plan to do so. 

• Not expect to close after completing a project or multiple projects. 

• Not be controlled by another company or have more than half its shares owned by another business.  

In addition, your company and qualifying subsidiaries must not have gross assets worth over £15 million before shares are issued and not over £16 million immediately afterwards. 

At the time of the share issue, your company must have fewer than 250 full-time employees and must carry out a qualifying trade.  

How do I apply to the Enterprise Investment Scheme?  

First, you should check if your company is eligible for the EIS with HMRC. This is known as advance assurance. 

Then, you can apply with a compliance statement if you’re the company secretary, a director, or an agent before issuing shares and sending a completed compliance statement to HMRC. An agent can also apply on your behalf. 

If you don’t have advance assurance, you’ll need to provide information and documentation during the application process, detailed here.  

If your application is successful, a letter of authorisation will be sent, alongside a unique reference number and a compliance certificate. 

Investors will need the unique reference number and compliance certificate to claim tax relief. 

What tax relief do investors get via the Enterprise Investment Scheme?

Individual investors can claim tax relief on up to £1 million, although this rises to £2 million if at least half the amount is invested in knowledge-intensive companies. 

There are different rules for knowledge-intensive companies and higher limits for investors. 

Knowledge-intensive companies and any qualifying subsidiaries must: 

• Have under 500 full-time employees when shares are issued. 

• Carry out work to create intellectual property and anticipate that the majority of future business will come from this within 10 years. 

• Have a fifth of employees carry out research for at least three years from the date of investment (and they must be in a role that needs a Master’s degree or higher). 

There are other conditions you must meet, which you can find here.  

Income tax relief  

You can claim tax relief on up to 30% of your investment.  

This means you can get £300,000 of income tax relief if you invest £1 million in a tax year when the money is invested in a company, or before if you treat some or all of the investment as being made in a previous year.  

For example, if you invest £100,000 in an EIS-eligible fund, £30,000 can be deducted from the current or previous year’s income tax bill.  

If you invest in an unapproved EIS fund, you can treat it as an investment made in the previous tax year, allowing you to invest up to £2 million in that year (£1 million in the current tax year and £1 million carried back to the prior tax year).  

Investors must hold their shares for at least three years, and the company must be EIS-qualifying during this time. The investor’s tax liability can be reduced to zero, but no more. 

Capital gains tax relief 

If an investor holds EIS shares for three years, any capital gains on the sale will be free from capital gains tax (CGT).  

However, income tax relief must be claimed on subscription and not withdrawn to be exempt from CGT when selling shares.  

Investors also don’t have to pay CGT straight away if they use their gains from the sale of any asset to invest in another EIS-qualifying company, but must claim deferral relief. Any investment must be made between one previous calendar year and three calendar years after you sell the asset.  

You’ll need to pay CGT when: 

• You sell your investment. 

• You are no longer a resident of the UK. 

• The company no longer qualifies for the EIS. 

• Your investment is cancelled, redeemed or repaid. 

Inheritance tax relief  

If you have shares under the EIS, they are eligible for business relief. This means they can be given to beneficiaries free from inheritance tax.  

The shares must be held for at least two years at the time of the death of the original shareholder. 

Loss relief 

As shares in EIS companies can be high risk, loss relief is available. 

So, this means if the shares are sold for less than the original amount invested, or their value falls to zero, investors can offset their losses. They can offset losses against their income tax or CGT bill. 

While loss relief can reduce any investment losses, investors cannot avoid losses entirely.  

What shares qualify for tax relief? 

For your shares to qualify for income tax relief under the Enterprise Investment Scheme, they must be: 

• Newly issued and paid for in full (in cash) 

• Paid for before the shares are issued 

Shares cannot be issued in many instances, such as to:  

• Protect your investment. 

• Structure company activities to benefit you in a way not intended by the EIS. 

Shares also cannot be issued if you plan to sell them at the end of the relevant period or in exchange for the company’s owner to invest in your firm for tax relief.  

It’s vital to check your company meets the conditions of the EIS, what’s allowed with invested funds, any limits on the money invested and the age of your business, as well as other factors listed here.  

When is tax relief withdrawn? 

An investment must remain in the company for at least three years to be eligible for all tax relief.  

Tax relief will be withdrawn if: 

• The company doesn’t meet all the conditions of the EIS. 

• You sell some or all of your shares. 

• You develop a connection with the company. 

• You get money or other assets from the company or an ‘unusually high’ interest on a loan from them. 

• The company repays money invested in shares to those who have not received tax relief (12 months before the share issue). 

Get expert financial advice 

Applying for the Enterprise Investment Scheme can be tricky, especially if your company needs investment for its long-term growth plans. 

If you’re an investor considering investing in an EIS-eligible company and want to use the available tax relief, there are also many criteria you must meet. 

Unbiased can quickly match individual investors and businesses to a qualified financial adviser who can help you navigate the EIS.