Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is a UK government initiative introduced on January 1, 1994, to encourage investment in small, higher-risk unlisted trading companies by offering tax relief to investors. Under this scheme, individuals who invest between £500 and £1,000,000 in eligible shares can earn a 30% tax relief on the amount subscribed. Additionally, gains from the sale of shares issued under the scheme are exempt from capital gains tax.

For investments made between April 6, 2012, and April 6, 2017, under the Seed Enterprise Investment Scheme (SEIS), tax relief increased to 50% for investments up to £100,000.

Examples of Enterprise Investment Scheme (EIS) Investments

1. Initial Investment:

   • An individual invests £50,000 in a qualifying startup under EIS.
   • The investor receives a 30% tax relief, equating to £15,000.
   • If the shares are sold at a profit, the gains are exempt from capital gains tax.

2. Loss Relief:

   • An individual invests £100,000 in an EIS-qualifying company.
   • Following a business failure, the loss can be offset against taxable income.
   • If the individual’s tax rate is 45%, they could claim loss relief worth £45,000.

3. Multiple Investments:

   • Over a tax year, an individual invests £500,000 across five different EIS companies.
   • This grants the investor a 30% tax relief, reducing their tax liability by £150,000.

Frequently Asked Questions (FAQ)

1. What types of companies qualify for EIS?

   • Small, higher-risk, unlisted trading companies based in the UK that adhere to specific trading, size, and balance sheet conditions.

2. What is the maximum investment one can make in a year under EIS?

   • The maximum annual investment eligible for tax relief under EIS is £1,000,000.

3. What happens if the investment is a loss?

   • Investors may be able to set the loss against their taxable income.

4. Are there any restrictions on the type of shares?

   • The shares must be ordinary shares without preferential rights to dividends or assets.

5. How long must shares be held to benefit from EIS relief?

   • Shares must be held for at least three years from the date of issue.

6. Can EIS benefits be combined with other schemes?

   • Yes, EIS can be combined with SEIS and other tax-efficient investment schemes.

7. Are gains on sales of EIS shares subject to capital gains tax?

   • Gains are exempt from capital gains tax if shares are held for three years.

8. What is ‘carry back’ in EIS?

   • ‘Carry back’ allows investors to treat some or all of the shares acquired in one tax year as acquired in the previous tax year.

9. Is there an annual limit for how much an individual company can raise through EIS?

   • Yes, companies are limited to raising £5 million each year through EIS and other state-aid investments.

10. What is the Seed Enterprise Investment Scheme (SEIS)?

    • SEIS offers tax relief of 50% on investments up to £100,000 in qualifying early-stage companies.

Related Terms with Definitions

• Seed Enterprise Investment Scheme (SEIS): A scheme offering tax relief of 50% on investments up to £100,000 in early-stage companies, valid between April 6, 2012, and April 6, 2017.
• Corporate Venturing Scheme (CVS): A UK scheme to incentivize larger corporations to invest in smaller companies by providing corporate tax relief.
• Venture Capital Trust (VCT): A type of publicly listed investment company in the UK that offers tax relief to investors in income-producing shares.

Online References

• The Enterprise Investment Scheme – Gov.uk
• Guide to the Enterprise Investment Scheme – Gov.uk

Suggested Books for Further Study

1. “Crowdfunding and Entrepreneurial Finance” by J.J. Reuer – Offers insight into alternative financing schemes like EIS and SEIS.
2. “Taxation of Small Businesses 2022/2023” by Malcolm James – Provides comprehensive information on tax schemes available to small businesses in the UK, including EIS.
3. “The Venture Capital Handbook” by David Gladstone – Explores the mechanisms and strategic importance of investment systems like EIS in venture capital.

Accounting Basics: “Enterprise Investment Scheme” Fundamentals Quiz

Thank you for diving into the world of high-stakes investment through the Enterprise Investment Scheme (EIS). Let these details and quizzes propel your understanding of effective and strategic investment under advantageous tax conditions!