Income tax relief
Claim 30% income tax relief on investments of up to £1 million with option to carry back to previous tax year.
Defer capital gains tax
On unlimited capital gains for up to three years before, or up to one year after, the date of the investment into the underlying companies.
Inheritance tax relief
On shares owned for two years or more (as long as shares are held at death).
Up to 45% loss relief against income or capital gains.
Your capital is at risk and you may not get back the full amount you invested. EIS investments are long term and high risk. Tax reliefs are subject to change and depend on personal circumstances. If you're unsure about your tax status you should seek advice from a financial adviser. Please read full details of the risks here.
What is the EIS?
The Enterprise Investment Scheme (EIS) was introduced by the government in 1994 to encourage the funding of small-medium enterprises (SMEs) by offering attractive tax advantages for investors. EIS investment vehicles can be a great way to support the growth of these companies and, in turn, the UK economy.
SMEs make up approximately 99% of all privately-owned UK businesses, employing around 16.3 million people*. In the early stages of their development many small companies struggle to secure finance through traditional avenues such as banks. EIS funds help plug this funding gap and give investors attractive tax reliefs.
However, an early-stage company is a high-risk proposition. There’s no guarantee it will become the next unicorn (a privately held start-up company valued at over $1 billion) or even succeed at all, so there is always the risk of potential loss.
The EIS remains popular, with the statistics showing that in the 2017-18 tax year 3,920 companies raised a total of £1,929 million of funds under the EIS.
*Department for Business, Energy & Industrial Strategy, October 2018.
What are the benefits of investing in an EIS fund?
If you have reached the lifetime limit on your pension fund, or you have used up your annual pension fund and ISA allowances in a tax year, then investing in an EIS fund can be a tax-efficient way to supplement these other long-term investments.
You have the potential to claim 30% income tax relief on investments up to £1 million in the current or previous tax year (subject to income tax liability, personal circumstances and a three-year holding period).
If you have a capital gains tax bill coming up you can defer paying the tax on any gain realised for up to three years before, or one year after the date your EIS shares are allotted.
100% of your investment can qualify for IHT relief if you hold the shares for at least two years and at death.
As the EIS fund invests in early-stage or start-up businesses, the potential for growth is substantial and any capital gains are tax-free. However, if it doesn't go to plan, you can claim up to 45% loss relief, which can be offset against income at your marginal tax rate or any capital gains (net of any income tax relief you may have received).
What are the key risks of investing in an EIS fund?
As they are long term investments in early stage companies EIS funds are high risk and are not suitable for everyone. We recommend that you seek financial advice and be comfortable with taking on the following risks before you put money into an EIS fund.
The value of your EIS investment and any income from it can go down as well as up, so you might lose money. Also, it can be hard to sell your EIS shares so you should be prepared to hold them for four - eight years. And you cannot rely on the past performance of an EIS fund to judge how successful it will be in the future.
Investing in an EIS allows you to access various tax reliefs. However, these depend on personal circumstances and may change in the future. Moreover, if an EIS qualifying company loses its qualifying status then your tax reliefs are likely to be affected.
Please note this is only a brief overview of the risks involved with investing in an EIS fund. Please read full details of all the risks here before investing.
What are the ways of investing in the EIS?
There are two ways to invest in EIS-qualifying companies - via an EIS fund or a single company EIS.
In an EIS fund, the investment manager will split your money and other investors' money across a portfolio of carefully selected EIS-qualifying small-medium sized companies. You will receive shares in these companies, which will be held on your behalf by a nominee company.
EIS funds are either HMRC 'approved' or 'unapproved*'.
For an approved EIS fund HMRC will review the fund's prospectus and provide advance assurance of its EIS-qualifying status. This means income tax relief is given in the tax year the EIS fund closes and you lose the ability to 'carry back' tax relief to the previous tax year.
Unapproved EIS funds are the most common and flexible type of EIS funds. Tax reliefs are available from the date the EIS fund invests in each company, which means you don't have to wait until the fund closes to get your tax relief and you gain the ability to 'carry back' tax relief.
*An unapproved EIS fund is what we offer at Downing.
Single company EIS
In a single company EIS, your money is invested directly in one business that you select. However, putting your money into just a single company gives you no diversification and therefore increases your risk.
With both EISs, you may find it difficult to sell your shares unless the business is sold or the company buys back the shares from you.
How do EIS funds work?
An EIS fund is essentially a collective discretionary investment management service. This means that your money is pooled with that of other investors and invested in a portfolio of companies that qualify for EIS finance.
Rather than owning shares in the EIS fund, you will own shares in each of these individual companies (via a nominee who holds the share certificates for you).
When an EIS fund sells it's investment you will receive the value of your shares, including any capital growth on your initial investment. Some companies exit through flotation on a stock exchange but the majority are acquired by trade buyers looking to expand their operations.
How does a company qualify for EIS investment?
To qualify for EIS funding a company must adhere to a set of rules laid down by HMRC. A company may initially qualify for EIS funding but lose its status if its circumstances change. If this happens within three years of your investment, you may need to repay the income tax relief you previously claimed for investing in that company. Downing and its tax advisers closely monitor the EIS status of the Downing Ventures portfolio companies to minimise the risk of this happening.
As an overview, to qualify for EIS funding a company must:
- Undertake a qualifying trade
- Be based in the UK and focused on growth and development
- Not be listed on a main stock exchange
- Be less than seven years old
- Not be controlled by another company
- Have fewer than 250 full-time equivalent employees at the time of investment
- Have a maximum of £15 million in assets at the time of investing and £16 million after investment
- Not receive more than £5 million in ‘state aid’ per 12-month period
Note that some of these rules are slightly different for 'knowledge intensive' companies. This is a summary and a full list can be found on the HMRC website.