How Enterprise Investment Scheme (“EIS”) can support the growth of your business

There are many ways in which a start-up business, and indeed growing businesses, can raise finance and one of the ways which has been popular in recent years is using the Enterprise Investment Scheme (“EIS”). The EIS scheme was introduced many years ago in 1994 and has changed somewhat over the years although it remains a great way of encouraging UK resident individuals to invest in smaller trading companies, while achieving some great tax reliefs.

The main reason for this for the scheme’s popularity is companies can raise up to £5 million in any twelve-month period (£10 million for certain ‘knowledge intensive’ companies) to help grow their business, and at the same incentivise the investor with the tax reliefs available. The tax reliefs this can provide are outlined below, subject to the relevant conditions for the investor and the company being met. These conditions are quite complex but in essence the following must apply (NB: this is not an exhaustive list just a few of the main conditions):

Investor

• The individual must be subject to UK tax in order to obtain EIS tax relief.
• Must subscribe for ordinary shares in cash. The shares must be issued before 6 April 2025 and there will need to be a significant risk of loss of capital for the investment to qualify.
• The individual must not be ‘connected’ with the company in the two years before the share are issued, and three years after the date of issue of the shares (or the date the relevant company started trading if later). Being connected means either being an employee/director of the company (although directors can still qualify in certain circumstances), or owning or being entitled to acquire, directly or indirectly more than 30% of the ordinary or issued shares in the company or in its voting power.  Connection can also exist if there are ‘linked loans’.

Company

• It must be an unquoted trading company subject to corporation tax in the UK
• It must carry out a “qualifying trade“ and not include any excluded activities (a list of these can be provided)
• Gross assets of the company must not exceed £15 million before the money raised for the EIS investments and £16 million after the EIS share issue and the money must be used within a two year period from the date of issue of share or commencement of trade

Provided that all the qualifying conditions are met for the company and the individual, then an investor can claim income tax relief of up to 30% of the amount invested (up to a maximum of £1 million in a single tax year). An additional £1 million can also be invested in “knowledge intensive companies” and qualify for EIS relief. There is also an option under certain circumstances for some of the relief can be carried back to an earlier tax year.  Income tax relief is only available if the individual receives an EIS compliance certificate from the company.

Another benefit of an EIS investment is that when the EIS shares are disposed of they are free from capital gains tax, as long as they’ve been held for a three-year period and the original qualifying conditions are met. Where the shares have been held for a two-year period, they are likely to also qualify for relief from inheritance tax via ‘business relief’.
This is another alternative way of raising vital funds for growing businesses as well as incentivising your investors. If you have queries surrounding this and would like to discuss further, please contact our Tax Manager, Janine Levine or your usual contact.

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