Enterprise Investment Scheme (EIS) -EIS tax relief

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The Enterprise Investment Scheme (EIS) is a type of Venture Capital Trust (VCT) scheme many individuals may decide to invest in. This includes limited company contractors as well as other business owners and individuals. When a UK contracting professional invests in EIS, HMRC allows them to claim 30% income Enterprise Investment Scheme EIS tax relief against their overall income tax bill. In this short guide we will investigate what is EIS tax relief (HMRC) and how the Enterprise Investment Scheme (UK) works. Besides the EIS income tax relief, we will also look into HMRC EIS eligibility and the EIS tax benefits.

EIS investments were introduced in 1994. An EIS investment has a range of tax benefits for individuals, in return for becoming a shareholder. What’s more, the types of companies which offer EIS investment opportunities are early-stage businesses and therefore the investments into these new EIS companies are high risk. If you are thinking about investing, you should look for an EIS investment opportunity. There are plenty of guides and helpful information online with regard to EIS advice from websites that specialise in EIS.

In this guide, we’ll take a look at HMRC EIS guidance and discover the Enterprise Investment Scheme tax benefits. We’ll also look at the EIS scheme requirements, EIS investment rules and claiming tax relief on EIS investment (UK). Before you invest, it is good to be aware of how Enterprise Investment Scheme income tax relief works. Therefore, if you are looking to benefit from some EIS tax breaks, it is good to know how the rules work first.

Initial considerations 

VCT schemes in general

In general, Venture Capital Trust schemes (VCT), of which EIS (UK) is one, offer tax relief to UK individuals (not companies). These schemes encourage individuals to invest in companies and social enterprises, and in return, they receive Enterprise Investment Scheme tax relief. Notably, the companies and enterprises are not on any recognised stock exchange. The schemes that are out there that you can take part in are:

  • Enterprise Investment Scheme (EIS).
  • Seed Enterprise Investment Scheme (SEIS).
  • Social Investment Tax Relief (SITR). 

Contractors and individuals investing in VCT schemes

As a limited company contractor or individual, under VCT schemes, you can personally invest directly in a company or enterprise that qualifies for one of these schemes. The types of business that offer EIS opportunities are often knowledge intensive companies (KIC). To qualify for the scheme, they must be operating a qualifying trade. There are more guidelines on the HMRC website regarding what HMRC view as EIS qualifying companies and EIS eligibility. Basically, it is key to note that investing into EIS qualifying shares in new startups are on a personal basis, rather than through your UK contractor limited company or other business.

When investing in an EIS qualifying company, you will also need to ensure that you meet the conditions for EIS investor requirements. In addition, the company or enterprise will need to meet the EIS general requirements for the scheme.

The EIS scheme investments will need reporting on your Self-Assessment Tax Return. However, it is possible to overlook this when you complete your tax return. Therefore, it is important to keep the details of any EIS company investments safe. Another article on this site details this and other potential Self-Assessment tax errors.

Common questions

Those who are thinking about investing in EIS schemes may have certain questions before they invest. These questions on investing in EIS may include:

  • What is an EIS?
  • How does EIS work?
  • What are EIS investments?
  • How can I find EIS tax-efficient investments?
  • How to claim EIS relief?
  • How do you report EIS?

In this guide, we’ll take a look at investing in EIS and the benefits of EIS scheme. We’ll also look into EIS requirements and find out how EIS scheme tax benefits work. 

HMRC Enterprise Investment Scheme overview 

The scheme aims to help small companies, often with a high-risk nature, in their activities. The help comes by raising finance and it offers EIS investment tax relief on new EIS shares in an EIS-qualifying company. From the investor’s point of view, this is a tax-efficient way to make EIS investments in small start-up companies. What is more, an EIS scheme relief of £1,000,000 per person per year is available for EIS-qualifying companies (£2 million for knowledge-intensive companies).

Important to take note that the EIS scheme is very attractive to potential investors. This is because besides receiving EIS income tax relief, there is also a EIS carry back relief feature. In effect, you can claim for EIS income tax relief carry back relief when you carry back EIS investments to the previous tax year. 

How to claim EIS tax relief and the CGT exemption 

Income Tax Relief and the EIS tax benefits

There are several EIS benefits, the main one of which is Enterprise Investment Scheme relief can be claimed at 30% on EIS qualifying investments up to £1,000,000 in any tax year. It gives a maximum tax reduction in a tax bill (assuming your tax bill is this high) in any year of up to £300,000. What is more, the allowances and EIS income tax relief are for individuals. A married couple could invest up to £2 million each tax year, entitling them to the maximum amount of EIS tax relief available of £600,000.

When you invest in EIS, to be eligible for EIS investment tax relief, you must hold the shares for at least three years from the date of issue. Failing to do this will result in HMRC withdrawing the EIS scheme tax relief.

With regards to EIS eligibility, people who are connected to the company will not qualify. Connections come in terms of employment or financial interest. Under EIS eligibility rules, If such individuals invest in the company offering the investment, they are not entitled to Income Tax Relief on their shares. Therefore, to qualify for the EIS scheme benefits that this provides, you must be an EIS qualifying investor.

The scheme can be a great way to invest funds and there are several EIS tax benefits. This comes in the hope of a better return in terms of capital growth than other ways of investing or saving. The main reason here is the favourable tax treatment. This is because the scheme allows you to save 30% of your tax bill, subject to the EIS limits mentioned earlier. 

Capital Gains Tax (CGT) exemption   

Please take note, any gain the EIS tax efficient investments are Capital Gains Tax-free, and this is providing that:

  • You hold the shares for at least three years; and
  • You claim the income tax relief on them.

A further consideration is that the investor can hold the shares for longer. It will then potentially allow the investor to accrue their CGT exemption over an extended period, which can be a great attraction and another one of the EIS tax benefits.

Further tax reliefs are available in respect of EIS. Please take a look at HMRC’s guidance on these areas for additional information:

  • EIS Loss relief and;
  • CGT EIS deferral relief. 

Other thoughts on the EIS Scheme -EIS carry back and claiming EIS relief 

HMRC EIS relief carry back

An EIS ‘carry back’ feature is available when an individual invests under the scheme. The EIS relief `carry back’ feature will allow you to treat all or part of the cost of shares that you acquire in one tax year as though you had acquired those shares in the prior tax year. Relief is then given against the Income Tax liability from the previous year rather than against the tax year in which you bought those shares. In addition, this is subject to the overriding limit for relief for each year. 

Claim for your EIS tax relief 

An investor who invests in the HMRC Enterprise Investment Scheme can claim relief once the company sends through an Enterprise Investment Scheme claim form. The official EIS claim form for this is called an EIS3 form and you will receive one of these for each investment. Once the investor receives the HMRC EIS3 claim form, they can make their claim for EIS relief (HMRC) through their Self-Assessment tax return. They will do this in the tax year that covers the share issue, although, as mentioned earlier, there is also the EIS tax relief carry back feature.

Please visit the HMRC website article if you need more details and information on the EIS scheme. 

Final thoughts

Although the Enterprise Investment Scheme (HMRC) is not suitable for all, it could be worth considering for some UK contractors and other individuals. As a contracting professional, when you invest via one of these schemes, you can benefit from EIS tax benefits. If you have savings that are not earning a reasonable interest rate, this is one option you could consider.

It is important to take note that the EIS income tax relief is attractive. This is because you can save a fair amount of personal tax under EIS tax reliefs. However, this also does depend on your level of earnings. You will also need to review the EIS eligibility guidelines before investing.

Finally, you will need to do detailed research before investing in any company. As part of this, you should also look at how your potential investment into an Enterprise Investment Scheme fund might perform in the future.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2023 / Categories: Self-Assessment /

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