Introduction

The Enterprise Investment Scheme (EIS) is intended to help small, higher-risk unquoted trading companies raise capital. It does so by providing a range of tax reliefs to individuals who subscribe for shares. Detailed conditions must be met by both the investor and the company over a prescribed period and any relief given may be clawed back if these conditions cease being met. 

This briefing note provides an outline of the EIS. A similar scheme - Seed EIS - provides tax reliefs for investments into small, start-up companies. Information on SEIS is separately available. Tax advice should always be taken, both on investment and in respect of any changes during the prescribed holding period.

Outline of the reliefs available

Provided all the conditions are met over the appropriate time periods, the tax reliefs available include: 

• Income tax relief of 30% on the amount subscribed for EIS shares. The maximum relievable investment is £1million per annum, or up to £2million if the additional £1million is invested into ‘knowledge intensive’ companies. Relief can be carried back to the previous tax year, subject to being within the annual limit. 

• Capital Gains Tax (CGT) exemption on disposal of EIS shares on which income tax relief has been claimed. 

• CGT deferral is available on gains made on disposal of other assets. Gains can be deferred if they were realised in the three years before or one year after the share subscription. Deferred gains come back into charge on sale of the EIS shares or if the relevant conditions cease being met. This can include the investor becoming non-UK resident. 

• Inheritance tax business property relief (BPR) may be available on EIS shares that have been owned for at least two years. BPR is not part of the EIS; relief may be available due to overlap in the relevant conditions.  

Conditions

Various conditions must be met by the investor, the company and the shares for EIS relief to be available. Notably:  

• Income tax relief and the CGT exemption are only available provided (i) the investor does not have a substantial (more than 30%) interest in the company and (ii) the investor is not an employee. In certain cases it is possible for the investor to be a director, though specific conditions must be met. 

• Relief is only available on investments into trading companies that have long-term objectives to grow and develop their trade. EIS is unavailable where the investee company carries on “excluded activities” to a substantial extent. This includes, but is not limited to, dealing in land and property development. 

• EIS relief is only available if, by making the investment, the investor puts his or her capital at risk and so could make an overall loss on the investment, considering the net investment return, loss of capital and tax reliefs.

• The company must be unquoted (listing on AIM is acceptable for EIS purposes). 

• The company must have gross assets of £15million or less before the EIS investment is made and no more than £16million gross assets immediately following the issue of EIS shares. There are also limits on the maximum amount that a company can raise each year and over its lifetime through the EIS and similar schemes. The relevant limits vary depending on whether the company qualifies as knowledge intensive. 

• In the case of groups of companies, the above limits on the value of gross assets apply to the value of the entire group and the group must also meet various conditions. 

• The reliefs are only available on subscriptions for fully paid-up new ordinary shares that do have any terms that seek to limit an investor’s risk. 

• Furthermore, conditions apply which prevent an existing shareholder from qualifying for EIS income tax relief on a new share subscription unless the existing shares meet specific criteria.

• In order to qualify as ‘knowledge-intensive’, such that the aforementioned higher investment limits apply, the EIS company must meet conditions which, broadly, relate to its research and development expenditure, creation of intellectual property and/or the number of skilled employees.

The conditions must be met both at the date of the investment and for the three years following the issue of the EIS shares (or three years after trading commences, if the company has not begun trading when the investment is made). If the above conditions are not met throughout the three year period, any income tax relief claimed may be clawed back, the CGT exemption on disposal of the EIS shares will be unavailable and any gains on disposal of other assets which were deferred using EIS CGT deferral will come back into charge. 

Commercial issues

Whilst they are attractive, the tax benefits of EIS investments are only one point of which a potential investor should be aware. Notably: 

• EIS investments carry significant investment risk, so it is essential that appropriate investment advice is taken from an FCA authorised advisor. 

• The initial tax reliefs are only available on subscription for new shares and so there are unlikely to be many potential purchasers of second-hand EIS shares. This means that it can be difficult to sell EIS shares.

EIS sunset clause

EIS tax reliefs are currently legislated to be available on qualifying share subscriptions made before 6 April 2025, but not on share subscriptions made on or after this date. A similar sunset clause applies to Venture Capital Trust (VCT) investments. However, at the Autumn Statement (22 November 2023), the government announced that it will legislate to extend the operation of the EIS and VCT relief schemes from 6 April 2025 until 6 April 2035.