What is an EIS

What is the Enterprise Investment Scheme (EIS)?

Risk warnings for EIS Schemes

Individuals should always read and bear in mind the risk warning notices that are included within providers’ investment offer literature/documentation, including prospectuses, information memorandums, securities notes, brochures and other related marketing literature. While the following list is not exhaustive, some of the main risks to be aware of include:

  • Investments are in small, unquoted companies and should be considered as high risk
  • Investments are illiquid and generally need to be held for at least three years before any tax benefit can be claimed;
  • An EIS/Seed EIS investment should be viewed as a long-term investment
  • Legislation, along with the nature and level of tax reliefs is subject to change. There can be no certainty that investments will be eligible or remain eligible for EIS/Seed EIS Relief
  • Historic investment performance cannot be used as a guide to future performance, and the value of any given investment may rise or fall
  • Many EIS/Seed EIS Schemes involve investment in a single company or sector and therefore should only be considered as a small part of an overall portfolio
  • Investors may not have independent representation on the Boards of investee companies, which may mean their interests, are not adequately considered, relative to the executive team
  • EIS/Seed EIS investments should only be undertaken by sophisticated investors who understand, and have given careful consideration to, the underlying investment strategy and associated risks. For help in determining potential investment suitability, professional advice should be sought
  • Often there will be no regulatory oversight and investors will usually not be eligible for compensation if things go wrong

The Enterprise Investment Scheme (EIS) is designed to help smaller and typically higher-risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in these companies. Although EIS was originally designed to encourage direct investments in companies by individuals, there are now multiple EIS funds and portfolio services where professional managers will select companies to invest in on behalf of their investors.

The government introduced the EIS in 1994 to promote investment in small, unquoted companies.  As the popularity of EIS products has grown, the products themselves have evolved to appeal to a broader range of investors.

Type of EIS portfolio solutions

There are primarily three types of EIS solutions available in the market:

An investor can make an investment directly into a single company EIS. This allows the investor total control over how their money is invested. However, there is a lack of liquidity associated with this type of investment as there is often no opportunity to sell one’s shares, unless the company has enough cash reserves to carry out a share buyback or is sold.
These are professionally managed portfolios (often referred to as “funds” although technically these are collective investment pools) that invest on investors’ behalf in a number of underlying EIS companies. There are two types of EIS portfolio services:

  1. An approved fund – HMRC vets the fund prospectus and proposed investments and grants approval, thus guaranteeing it to qualify for income tax relief in the forthcoming tax year. In order for the fund to take advantage of its approved status, it has to invest 90 per cent of its assets in the 12 months following the fund close.
  2. An unapproved fund – An unapproved fund gets its income tax relief on the date of each investment it makes in a qualifying company and there is no 12 month deadline for an investment of funds.

In the wake of legislation introduced in 2009 which provided the ability to carry back the EIS investment to the previous year, the majority of portfolio services operate on an unapproved (“fund”) basis.

(a) Manager-Approved EIS Company List.
This discretionary service provides investors with a list of pre-approved EIS companies. Investors can decide how to allocate to the different EIS companies on the Manager’s approved list using any combination that they prefer.

(b) Multi-manager EIS platform.
This discretionary service enables investors to access multiple managers’ portfolios that are available on a third party platform. Investors can decide how to allocate to the different EIS Managers using any combination that they prefer which allows the investor simultaneous access to multiple portfolios (subject to the platform’s minimum requirements).

EIS tax reliefs

It is important to note that tax reliefs are only available to individuals aged 18 years or over. Investors are not eligible for Income Tax relief on the cost of their shares if they are connected with the EIS company.  For further details on the rules, please go to:http://www.hmrc.gov.uk/eis/part1/1-3.htm

Summary of Tax Benefits

Tax Efficient Comparison Table EIS SEIS BR VCT
Investment Limits 2013/14 and 2014/15 £1 million (A) £100,000 (D) No limit £200,000
Capital Gains Deferral Up to 28% (B) n/a n/a Nil
Capital Gains
Re-investment Relief
n/a Effective relief up to 14% (E) n/a Nil
Income Tax Relief 30% 50% n/a 30%
Min Holding Period 2 years for IHT
3 years for EIS
2 years for IHT
3 years for SEIS
2 years 5 years
IHT Free Yes after 2 years Yes after 2 years Yes after 2 years No
Tax Free Exit Yes/No (C) Yes after 3 years Yes, after 2 years Yes
Secondary Market No No No Yes
Loss Relief Yes Yes N/A No
Carry Back Facility Yes Yes N/A No
Tax Free Dividends No No No Yes
Business Relief 100% after 2 years 100% after 2 years 100% or 50% after 2 years (F) No

(A) Up to £1M of EIS investment may be carried back to the previous tax year if the limit for that year was not fully utilised.
(B)Gains arising in 2013/14 and 2014/15 to higher rate UK tax payers are chargeable at 28%. The relief is a deferral only, and not an exemption and the deferred gain will crystallise on sale of the EIS shares.
(C) There is no tax free exit for shares for which EIS deferral relief only was claimed.
(D) Up to £100k of SEIS investment may be carried back to the previous tax year if the limit for the year was not fully utilised.
(E) SEIS reinvestment relief exempts half of the gain reinvested up to the SEIS maximum investment of £100k ie for a gain of £100k reinvested in an SEIS investment, £50k of the reinvested gain is exempt
(F)A business or an interest in a business-100%
Unquoted securities which on their own or combined with other unquoted shares or securities give control of an unquoted company-100%
Unquoted shares-100%
Quoted shares which give control of the company-50%
Land or buildings, machinery or plant used wholly or mainly for the purposes of the business carried on by a company or partnership-50%
Land or buildings, machinery or plant available under a life interest and used in a business carried on by the individual-50%

The following table summarises the IHT tax relief evolution history.

From To Threshold/nil rate band
06 April 2009 05 April 2015  £325,000
06 April 2008 05 April 2009  £312,000
06 April 2007 05 April 2008  £300,000
06 April 2006 05 April 2007  £285,000
06 April 2005 05 April 2006  £275,000

Source: HMRC. Website: http://www.hmrc.gov.uk/rates/iht-thresholds.htm

Changes following the 2015 summer finance bill:

The summer finance bill 2015 introduced several new restrictions on EISs:

  • the lifetime allowance of tax advantaged funding that an investee company can receive was capped at £12m unless the company is ‘knowledge intensive’ in which case the cap is £20m;
  • EIS’s can no longer invest in business’ once 7 years have elapsed since their first commercial sale with this extending to ,10 years should the business be deemed ‘knowledge intensive’. N.b this will not apply where the investment represents more than 50% of turnover averaged over the preceding 5 years;
  • EIS’s will no longer be able to reinvest monies raised from exits in business that were previously eligible at the time of funding into similar transactions.
  • The previous requirement for 70% of Seed Enterprise Investment Scheme (SEIS) money having to be spent before VCT funding can be raised has been lifted.

As of yet the definition of ‘Knowledge intensive’ is undefined by HMRC.

Risk warnings for EIS Schemes

Individuals should always read and bear in mind the risk warning notices that are included within providers’ investment offer literature/documentation, including prospectuses, information memorandums, securities notes, brochures and other related marketing literature. While the following list is not exhaustive, some of the main risks to be aware of include:

  • Investments are in small, unquoted companies and should be considered as high risk
  • Investments are illiquid and generally need to be held for at least three years before any tax benefit can be claimed;
  • An EIS/Seed EIS investment should be viewed as a long-term investment
  • Legislation, along with the nature and level of tax reliefs is subject to change. There can be no certainty that investments will be eligible or remain eligible for EIS/Seed EIS Relief
  • Historic investment performance cannot be used as a guide to future performance, and the value of any given investment may rise or fall
  • Many EIS/Seed EIS Schemes involve investment in a single company or sector and therefore should only be considered as a small part of an overall portfolio
  • Investors may not have independent representation on the Boards of investee companies, which may mean their interests, are not adequately considered, relative to the executive team
  • EIS/Seed EIS investments should only be undertaken by sophisticated investors who understand, and have given careful consideration to, the underlying investment strategy and associated risks. For help in determining potential investment suitability, professional advice should be sought
  • Often there will be no regulatory oversight and investors will usually not be eligible for compensation if things go wrong