A Guide To The Enterprise Investment Scheme (EIS) For UK Investors

The Enterprise Investment Scheme (EIS) is a UK government-backed program designed to help early stage startups raise money from investors. EIS offers tax breaks and other benefits to investors looking to make seed stage investments into UK qualifying startups, making it an attractive option for those looking for early stage investment opportunities in the UK. In this blog post, we'll take a closer look at what EIS is and how it can help startup businesses attract investment capital.

What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme was introduced by the government in 1994 to help small companies raise funds and grow by offering generous income tax and capital gains tax reliefs to prospective investors looking for early stage investment opportunities in the UK.

To qualify, a company needs to carry on a trade with a view to making a profit. However, there are some exclusions, such as those that deal in land, commodities or shares. There are also restrictions on a company’s age and size. 

Companies qualifying for the EIS are small and usually privately owned.They will typically have gross assets of less than £15 million at the time of investment and fewer than 250 employees, although there are now more relaxed rules for knowledge-intensive firms.

What is Enterprise Investment Scheme (EIS) Advance Assurance?

If a company has received Advance Assurance, it means that HMRC has confirmed the company's proposed share issue would qualify for EIS tax relief, based on the information the company provided. This being said, Advance Assurance is not a guarantee that the company will qualify for EIS tax relief. 

What are the tax breaks from investing in Enterprise Investment Scheme (EIS) qualifying companies?

Investors can benefit from a variety of tax breaks when investing in Enterprise Investment Scheme (EIS) qualifying companies. These include:

• Up to 30% income tax relief
• Tax-free growth
• Capital gains deferral
• Inheritance tax relief
• Loss relief on exit

Please remember that the benefits you receive depend on an investors’ individual circumstances and that tax rules can change. It is important to note that in order to qualify for these benefits, the company must maintain its EIS status.

When can I claim the income tax relief from my EIS Investment?

In order to claim the income tax relief from your EIS Investment, you must wait until the shares are allotted and you have received your EIS3 certificate. This process can take up to six months, and the tax relief can be claimed for the tax year the fund closes. However, you can only claim the relief once you have received the EIS5 certificate, which may take up to 24 months after the fund closes.

When will my shares be allotted, so I can claim tax relief?

You should receive your shares around the same time as the fund closes, which is typically within the same tax year. This will be considered your investment date for tax purposes.

How much can I invest in the Enterprise Investment Scheme (EIS)?

You can invest up to £1 million in the Enterprise Investment Scheme (EIS) per tax year. If you invest more than £1 million, it must be in 'knowledge intensive' investments in order to qualify for income tax relief and other benefits. The minimum investment will vary depending on the investment manager, but is typically around £10,000. Income tax relief can be carried back to the previous tax year if desired.

How can I invest in Enterprise Investment Scheme (EIS) qualifying companies?

There are many ways you can invest in EIS qualifying companies. You can invest in individual companies or EIS investment funds such a Britbots’ funds. EIS funds are available to invest in at any time - and have the added benefit of having a group of underlying companies having been selected for you by an investment exper - , while individual company offers tend to have a fundraising timeline meaning you will need to intersect the opportunity at the right time.

Should I Invest in a Enterprise Investment Scheme (EIS) investment fund or a single EIS qualifying company?

There are two ways to invest in EIS: by investing directly in a single EIS-qualifying company or by investing through a fund manager.

Investing in a single company gives you more visibility and control over your investment, but also carries greater risks because the success of your investment depends solely on the fortune of that company. 

Investing in an EIS investment fund affords you some diversification, usually within an area or sector. It also gives you the comfort that a professional manager is researching the opportunities and makes the investment decisions for you. That said, some or all of the portfolio companies could fail and you could lose money.

Do I invest in a general EIS investment fund or a specific EIS investment fund?

If deciding to invest in an EIS investment fund it is important to be aware of the scope of what sort of companies that investment fund in targeting. Some funds focus on targets across all categories - e.g. consumer, fintech and robotics investment opportunities could all be in your portfolio - whilst other funds such as Britbots’ specialize in one area - in our case investing in automation and robotics start ups.

What returns could EIS investments offer?

EIS investments offer a variety of potential returns, which can be mostly in the form of capital growth rather than dividends. Each investment will have a target return, but this is not guaranteed. The target returns vary significantly, from around 3x to over 10x money invested. Higher target returns often indicate higher risks.

How can I sell my EIS investment?

The way you would sell an investment trust is not usually how you would sell an EIS investment. Instead, the manager of the EIS will have a plan in place to return your capital and any tax-free growth. This will typically happen within four years, but there are no guarantees. Keep in mind that EIS investments should be considered long-term, as you must hold them for at least three years to keep the income tax relief.

What are the key risks?

The key risks with investing in EIS schemes are that the company may fail, resulting in a total loss of your investment, and that the shares may be harder to sell than other stock market investments. In addition, to retain all the tax reliefs available, you must hold the investment for a minimum period of three years and the companies must retain their qualifying status. Otherwise, you may have to pay back the income tax relief you have received. Please remember, all the tax and products rules mentioned here are those currently applying but could change in future. Tax benefits depend on circumstances.

About Britbots' EIS Fund

Britbots is a specialist SEIS fund and EIS fund investor investing in companies using artificial intelligence, robotics or other automation technologies to develop productivity gains. We are typically the first external investor into a business.

If you are an entrepreneur looking for pre-seed or seed investment in the UK automation, artificial intelligence or robotics space please email alex@britbots.com