Wednesday, August 04, 2021
EIS: A win-win for both startups and investors
Introduced in 1994, the Enterprise Investment Scheme (EIS) is a well-established feature of the UK’s investment landscape. The scheme encourages the flow of capital into startups by rebalancing investors’ risk and reward perceptions and allows smaller enterprises to compete for capital against larger and more established companies. The various tax reliefs offered by EIS makes it a very attractive method to invest.
Matthew Wilson, CEO of Asset Match, explains that EIS investment facilitates capital inflow for smaller, unquoted companies, which in turn promotes economic growth. Moreover, the scheme adds value for investors who can claim back on investments of up to £1 million per person per year in income tax relief and £2 million in the case of investments into knowledge-intensive companies (or KICs). EIS are subject to a variety of other forms of tax relief.
The forms of tax relief available can be broken down into 5 broad categories:
- Income tax relief of up to 30%, with a £2 million cap, provided at least £1 million is held in KICs;
- A full inheritance tax exemption (100%) is achieved after any EIS qualifying investment is held for at least two years;
- Loss relief of up to 61.5% to protect the investor when shares are disposed of at a loss;
- Zero CGT (capital gains tax) on the disposal of assets; and
- CGT deferral relief where CGT on gains realized on non-EIS investments can be deferred if they are invested into EIS qualifying shares.
“There are several conditions that companies must meet in order to be eligible for EIS investments,” says Matthew Wilson, noting that many of these criteria are more lenient for KICs. Notably, EIS-qualifying businesses cannot be listed on any recognized stock exchange, must have fewer than 250 full-time employees, and less than £15 million pre-investment gross assets. They may not be controlled by another business entity, nor control any other company (except for a qualifying subsidiary). The company must not be older than seven years when it first raises EIS-qualifying investment, and there are limits to how much money it can raise both annually and in total.
Matthew Wilson adds that investors are subject to certain checks and balances before being deemed eligible to invest via the EIS. “They must, for example, be UK taxpayers and have no connections to the companies they wish to invest in. Importantly, EIS shares must be held by investors for at least three years, with earlier divestment being subject to substantial tax-relief clawbacks and CGT on gains,” he explains.
Although the incentives and investor benefits all add up to make EIS one of the most tax-advantaged government-endorsed investments that an investor can make, Matthew Wilson cautions that this investment is not risk-free. “Considerable risk, and risk of loss, is an inherent feature of all EIS investments,” he says.
“Investors must be comfortable with the risks that they are taking versus the perceived rewards. Whilst EIS does not make investments without risk, it can tilt the balance in investors’ favour and increase their margin of safety and IRRs. In a healthy economy, EIS incentivises the movement of capital from where it is, to where it needs to be – agile startups receive funding for their growth, and investors have the potential for returns that are not available elsewhere. It really can be a win-win.”
How can investors access EIS investments?
Investors can access EIS investments via crowdfunding sites, IFAs, brokers and specialist providers. Asset Match gives access to its deal flow via AM Connect, a curated selection of investment opportunities that include EIS, secondary shares and convertible loan notes.