What is the Enterprise Investment Scheme (EIS)?

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Investors can benefit from a mix of upfront and ongoing EIS Tax Reliefs, such as:

• Up to 30% income tax relief
• Tax-free growth
• Capital gains deferral 
• Inheritance tax relief
• Loss relief on exit

Please remember: tax rules can change and benefits depend on your circumstances. EIS tax benefits are only available if the company maintains its EIS status.

The term "EIS-qualifying companies" generally refers to young and innovative businesses, such as those developing new tech. However, it typically does not include businesses like retail chains opening new stores.

In March 2020, the Chancellor granted final approval for Knowledge-Intensive (KI) funds within the EIS framework. A KI fund must invest at least 80% of its portfolio in "knowledge-intensive" companies that are actively involved in research, development, or innovation.

Investors in KI-approved EIS funds can benefit from setting their income tax relief against liabilities in the same tax year that the fund closes, or they can carry it back to the previous year. In contrast, traditional EIS funds allow investors to claim tax relief for each individual investment made in the tax year or carry it back to the previous tax year.

To claim EIS tax relief, investors must first receive their EIS certificate. Investors in KI funds can expect to receive a single EIS5 certificate issued by the fund once it has invested 90% of its capital, which must be done within 24 months of closing the fund. On the other hand, investors in non-approved funds will receive individual EIS3 certificates for each investee company as the fund deploys capital.

It's important to note that tax rules can change, and the benefits of EIS depend on individual circumstances. Additionally, to maintain KI approved status, a fund must comply with requirements specified by HMRC. Failure to meet these requirements could impact investor tax relief.

There are two primary methods for investing in EIS: direct investment in a single EIS-qualifying company or investing through a fund manager who constructs a portfolio on your behalf.

Both options have their merits and may find a place in the portfolio of an experienced investor.

Investing directly in a single company offers greater visibility and control, but it also entails higher risks as the success of your investment is dependent solely on the fortunes of that company. It's crucial to remember that many EIS-qualifying companies do fail.

Investing in an EIS fund provides some diversification, typically within a specific area or sector. It also offers the reassurance that a professional manager is conducting research and making investment decisions on your behalf. However, there is a possibility of some or all of the portfolio companies failing, leading to potential losses.

Investing in a managed portfolio through an EIS fund grants less control and visibility regarding where your money is allocated. Additionally, the expertise provided by the fund manager comes at a cost, making managed portfolios generally more expensive than investing in a single company.

It is important to note that all EIS investments carry high risk and are suitable only for experienced investors.

EIS funds are typically structured as evergreen funds, with shares being allotted throughout the year. However, it is important to note that it can take between 12 to 18 months from the time of your investment for shares to be allotted.

In the case of single company EIS offers, there is usually a closing date, which can either be a pre-determined date or the point at which the fundraising target is reached. Following the closing of the offer, shares are generally allotted promptly.

For knowledge-intensive approved EIS funds, the investment date for income tax purposes is considered to be the date when the fund officially closes.

Click here for more information on EIS Tax Relief and Loss Relief.

When it comes to EIS investments, the majority of returns are expected to come in the form of capital growth, rather than dividends, distinguishing it from VCTs.

Each EIS offer typically specifies a target return, which is strictly a goal and not a guarantee. These target returns can vary significantly, ranging from approximately 1.3 times to over 10 times the initial investment. It's important to note that higher target returns often correspond to higher levels of risk involved.

Unlike VCTs, EIS investments are not traded on the stock market. Typically, investors participate in EIS through a broker, such as Stockbrook Capital.

There is a wide range of EIS investment opportunities available, including both individual company offers and EIS funds. EIS funds are often structured as evergreen, allowing investors to invest at any time. On the other hand, individual company offers tend to have a predetermined fundraising target, and once that target is reached, the offer will typically close.

The Advance Assurance service, provided by HMRC, is available for companies planning to raise funds under EIS, although it is not mandatory to use it.

When a company receives Advance Assurance, it means that HMRC has issued a letter confirming that the proposed share issuance would qualify for EIS tax relief, based on the information provided by the company.

It is important to note that Advance Assurance does not guarantee the company's eligibility for EIS tax relief. This can only be confirmed after the company has actually issued the shares.

Regardless of whether the company has obtained or applied for Advance Assurance, it is required to submit a compliance statement to HMRC after issuing the shares. Following this step, if all the necessary requirements are met, HMRC will authorise the company to issue EIS certificates.

Please be aware that, like all investments, the value and income from EIS investments can fluctuate, causing you to receive less than your initial investment potentially.

However, it is essential to note that investing in small companies, as is the case with EIS, carries an increased level of risk compared to other investment options. Small companies are inherently more volatile and prone to failure relative to larger enterprises, meaning you could potentially lose the entirety of your investment.

Consequently, it's crucial to understand that EIS investments are intended for long-term investment horizons and are unsuitable for everyone. They are primarily geared towards high net worth or sophisticated investors who have no immediate requirement for liquidity and can endure the possibility of a complete loss.

Furthermore, it is important to note that EIS investments lack a recognised market, rendering them less liquid than other investments traded on the stock market. This lower liquidity may make selling EIS shares more challenging.

Lastly, to retain all the tax reliefs associated with EIS, you must hold the investment for a minimum period of three years, and the companies must maintain their qualifying status. Failure to meet these criteria may necessitate repayment of the income tax relief previously received.

Please keep in mind that all the tax and product regulations mentioned here are current, but they are subject to potential changes in the future. The availability of tax benefits is contingent on individual circumstances.