Advisers who understand the Enterprise Investment Scheme are better equipped to add value to a range of clients’ planning.
With tax year-end nearing, now is the perfect time to build on your knowledge.
Let us start with a brief background, before covering how EIS can help clients, and then into a timely case study.
What is the Enterprise Investment Scheme?
EIS is a government-supported initiative that provides a valuable source of funding to early-stage companies.
It offers attractive tax benefits to investors in return for taking on the risk of investing in small businesses with high growth potential.
When investing in an EIS-qualifying business, you can claim several tax reliefs, including upfront income tax relief, tax-free capital gains, and loss relief on each investment that returns less than you put in.
The government introduced EIS in 1994, recognising that smaller businesses that scale into larger, established companies have a tremendous positive impact on the UK economy.
Since EIS was established, more than 31,000 businesses have benefited from £22bn of investment.
What companies can qualify for EIS funding?
EIS is designed to provide funding for small companies with growth potential that might otherwise struggle to find investment.
So, funding is directed to those companies that need it most.
Businesses must carry on a qualifying trade and be unquoted. They cannot be listed on a stock exchange. The exception to this is that they can be listed on AIM, which is treated as unquoted for the purposes of EIS.
A business must also meet certain requirements, including that the company must have been trading for fewer than seven years.
It must also be a relatively small company, with gross assets of less than £15mn. EIS companies must also have fewer than 250 employees.
Certain trades are excluded from EIS funding altogether, for example property development, leasing and professional services.
Why invest through EIS?
As we have established, for a company to qualify for EIS funding, it must be in the early stages of its growth journey.
Buying the shares of early-stage companies can come with significant growth potential because they are at the beginning of their growth curve. But with this growth potential comes higher risk.
To compensate for some of this risk, EIS-qualifying investments allow investors to claim several tax reliefs.
It is the combination of two of these reliefs – tax-free growth and loss relief – that make EIS such a powerful structure through which to target high growth from a high-risk investment.
On a per-company basis, a client can invest in an EIS company with high growth potential and pay no capital gains tax on growth.
The client can also make use of loss relief (against income or capital gains tax), on the difference between the amount invested net of income tax relief, and their proceeds on sale should their high-risk investment not pan out.
