The Enterprise Investment Scheme (EIS) is an HMRC-run scheme introduced by the government in 1994 to encourage investments in young, high-risk companies to help them raise funds and grow. In return, investors are offered generous tax benefits. An EIS fund is therefore a managed investment vehicle that raises finance from individuals for the purpose of investing in select EIS-eligible ventures.
Investors can choose to invest via an EIS fund or directly into a single company. If investing via a fund, monies will be deployed across a portfolio of around 5-10 companies. EIS funds offer a simple way of building investors a portfolio of early-stage businesses, or startups. With most EIS funds, the decision about which opportunities are chosen to make up your portfolio is made for you by the fund manager.
To help compensate for investing in high-risk businesses, there are significant tax benefits associated with the EIS investments. In fact, the Enterprise Investment Scheme is one of the most generous tax relief incentives available to investors in the whole of the UK.
Let’s take a look at some of these tax benefits in more detail…
The reasons you should invest in managed EIS funds are:
- You can get up to 30% income tax relief
- Inheritance tax relief
- Tax-free growth means any growth is 100% tax-free
- Loss relief reduces the impact of losses
- Capital gain deferral
1. You can get up to 30% income tax relief
Investing in managed ‘EIS’ funds means you can get up to 30% Individual Income Tax relief for shares held for more than 3 years.
The maximum investment that investors can claim relief on in a single tax year is £1 million, which amounts to £300,000 of income tax relief. This allowance is increased to £2 million if invested into knowledge-intensive companies. These are young companies typically focused on research and development, which meet additional requirements set out by HMRC. If invested into knowledge-intensive companies, you could claim up to £600,000 in income tax relief.
You can claim income tax relief after your shares are allotted and you receive your EIS3 certificate, which can take around six months to be produced. Note, for knowledge-intensive approved funds the position is different. The tax relief can be claimed for the tax year the fund closes, but only once you’ve received the EIS5 certificate, which may be up to 24 months after the fund closes.
2. Inheritance tax relief
EIS shares qualify for Business Property Relief (BPR) which means they can be left to beneficiaries free from inheritance tax, as long as they’ve been held for at least two years at the time of death.
3. Tax-free growth means any growth is 100% tax-free
When investors sell EIS shares, any growth in value from an investment is 100% tax-free. This is huge because small, early-stage companies have the potential to grow significantly.
To qualify for this relief, income tax relief must have already been claimed – and not withdrawn by HMRC. Also, investors have to hold the shares for at least three years, and the company must remain EIS-qualifying for at least three years.
4. Loss relief reduces the impact of losses
EIS-qualifying investments involve buying shares in early-stage companies, so the risk of these shares dropping in value is higher than most investments.
Loss relief reduces the impact of losses made on individual companies. This is the case even if an investor holds a portfolio of EIS companies that, overall, has delivered a positive return.
5. Capital gain deferral
A gain made on the sale of other assets can be reinvested in EIS shares and deferred over the life of the investment. There’s no upper limit on the value of gains that can be deferred.
Active vs passive funds
When looking to invest in an EIS fund, one of the first things to consider is whether you want to put your money into an active or a passive fund. When you invest in an active fund, your money goes to a fund manager who picks investments based on their own research, intuition and expertise. With a passive fund, a set of rules define an index which then determines what the fund invests in.
At velocity capital, we are active, not passive EIS fund managers bringing to bear our own experience as entrepreneurs, financiers, marketeers on businesses we support, but also additional services provided through our extensive networks.
We are Velocity Capital: A network of founders and experts who invest in exciting, innovative, technology enabled businesses. Want to find out more about what we do or are looking to invest? Get in touch.
Written by Kate, for Velocity Capital.