What is an EIS?
An Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. An EIS can be as simple as a single company investment, or it could be an EIS fund consisting of 10-15 unquoted companies. In this instance the investor would still own the individual shares.
Qualifying Companies must:
- Have no more than 250 employees.
- Undertake a "qualifying trade", which generally excludes property, hotels, nursing homes, dealing in land or commodities, financial or legal services, leasing etc.
- Have equal to or less than £15m gross assets at the time of investment.
- Receive no more than £5m of VCT or EIS investment in any 12-month period.
- 30% income tax relief if held for three years
- IHT relief (if held for two years)
- Capital gains tax exemption
- Loss relief
- Capital gains tax deferral
- There is no secondary market for EIS shares and capital can only be returned once the underlying assets are sold. They are therefore extremely illiquid and should be considered long-term investments.
- Due to the long investment time frame, inflation may erode the value of your capital.
- The underlying firms are, by their nature, very early stage and consequently extremely high risk. It is possible they may fail completely and none of your capital will be returned.
- To qualify for the tax benefits associated with EISs the underlying companies are subject to HMRC approval. This can take up to eight months, and in some extreme cases it may not be granted at all.
- Certain EIS proposals will involve an investment into a single project through only one EIS company, and obviously this concentrates the risk of company failure.
EISs are only suitable for wealthy and sophisticated investors who can afford to take the high level of risk and lock money away for the long term. They should also only represent a small proportion of a diversified portfolio.
For more information please visit the HMRC website at http://www.hmrc.gov.uk/eis/