Enterprise Investment Scheme (EIS): The Complete Guide
Investing can seem daunting, especially when you're faced with a sea of acronyms. If you've heard of the Enterprise Investment Scheme (EIS) but aren't quite sure what it is, how it works, or how to get started, you’re in the right place. EIS is a unique programme with major benefits for UK investors and small businesses.
Whether you're looking to save on tax, diversify your portfolio, or support emerging UK companies, understanding EIS could be a key step on your personal finance journey.
What Is the Enterprise Investment Scheme (EIS) and Why Should UK Investors Care?
The Enterprise Investment Scheme (EIS) is a government initiative designed to encourage investment in small, early-stage UK businesses. In exchange for investing in these higher-risk companies, the government offers a range of generous tax reliefs. The aim is twofold: help growing companies access funding, and reward investors for taking the risk.
For UK investors, EIS can offer:
Income tax relief of up to 30%
Capital Gains Tax (CGT) deferral and exemption opportunities
Inheritance Tax (IHT) relief after two years
Loss relief if your investment doesn’t work out
Quick Example:
If you invest £10,000 into an eligible EIS company, you could reduce your income tax bill by up to £3,000—regardless of the outcome of your investment.
How Does EIS Work? The Step-by-Step Process
If you're new to EIS, here’s how it works, step by step:
1. Find an EIS-Eligible Investment
Not every small company qualifies for EIS. To benefit, you need to invest in shares issued by an EIS-qualifying company. These are typically:
Unlisted UK companies (not on the main stock market)
Trading for less than 7 years (generally)
With fewer than 250 employees and less than £15 million in assets
Carrying out a qualifying trade (some trades like property development, banking, or legal services are excluded)
How to find EIS investments:
EIS Funds: Pooled investment funds that specialise in EIS-qualifying companies (e.g., through providers like Octopus Investments or SyndicateRoom).
Direct Investment Platforms: Platforms such as Seedrs and Crowdcube often feature EIS opportunities.
Angel Networks: Organisations like UK Business Angels Association list EIS deals for more hands-on investors.
2. Make Your Investment
Once you've chosen your company or fund, you buy new shares directly. The minimum and maximum investment amounts vary—note that you can invest up to £1 million per tax year (or £2 million if investing in ‘knowledge-intensive’ companies).
3. Receive EIS3 Certificate
After your investment is accepted (and the company meets relevant requirements), you receive an EIS3 certificate. This is the document you’ll need to claim your tax reliefs.
4. Claim Your Tax Reliefs
You’ll use the information from your EIS3 certificate to fill out your tax return or send a separate form to HMRC. You can claim tax relief for the tax year you invested or carry it back to the previous tax year, subject to limits.
Breaking Down the Main EIS Tax Benefits
The heart of EIS is its tax reliefs. Here’s how each one works:
1. Income Tax Relief (30%)
Offset 30% of your EIS investment against your income tax bill.
Example: Invest £10,000, and get up to £3,000 off your tax bill.
Must hold shares for a minimum of 3 years.
2. Capital Gains Tax Deferral & Exemption
Deferral: Pay no CGT now by reinvesting gains into EIS-qualifying shares.
Exemption: When you sell EIS shares after at least 3 years, any gain may be exempt from CGT.
3. Loss Relief
If your EIS investment fails, you can offset any loss (minus tax relief already claimed) against other income or gains.
Example: If you invest £10,000, claim £3,000 income tax relief, and the shares become worthless, you can offset the remaining £7,000 loss against income.
4. Inheritance Tax Relief
If held for at least 2 years, EIS shares are eligible for Business Relief, meaning they may be exempt from Inheritance Tax.
How to Invest in the Enterprise Investment Scheme
Step 1: Assess If EIS Is Right for You
Are you comfortable with higher risk? EIS investments are generally illiquid and risky.
Do you have a large enough tax liability to use the reliefs?
Are you looking for diversification beyond traditional investments?
Step 2: Choose Your Approach
Direct Investment:
Research companies and judge their business model, management, and growth potential.
Useful for hands-on investors or those with specific sector interests.
Through an EIS Fund:
Professional managers select a basket of EIS-qualifying companies, spreading risk.
Typically charges annual fees and a performance fee.
Step 3: Use Trusted Platforms and Advisors
Only invest via FCA-regulated platforms or trusted networks.
Read independent reviews and seek impartial financial advice if unsure.
Beware of high-pressure sales or overly optimistic return promises.
Step 4: Understand Timings and Paperwork
EIS tax relief hinges on receiving the correct certificate (EIS3).
Allow several months post-investment to receive EIS3, as the business must spend at least 70% of funds first.
Keep all paperwork safe for your tax return and records.
Step 5: Monitor Your Investment
EIS shares are often illiquid—you can’t easily sell them until an exit, such as company sale or flotation.
Track regular updates if investing directly. Funds should provide periodic reporting.
Understand that you must hold EIS shares for at least 3 years to keep your reliefs.
Tips, Pitfalls and Common Questions on EIS
Useful Tips
Diversify—invest smaller amounts in several companies rather than all in one.
Carry Back—if your income tax liability was higher last tax year, you can carry back EIS relief to the prior tax year.
Keep Good Records—losing your EIS3 certificate will make claiming tax relief far harder.
Common Pitfalls
Selling too soon—if you sell within 3 years, you’ll lose tax reliefs.
Not checking company status—the company may later lose EIS-qualifying status, so invest through reputable sources and double-check paperwork.
Expecting quick returns—EIS is usually a long-term play, sometimes 5–8 years to see an exit.
Frequently Asked Questions
Q: Is EIS only for the wealthy?
A: While many EIS investors are higher earners (to benefit from the tax reliefs), minimum investments vary and some platforms allow you to invest from £1,000 upwards.
Q: Can I invest through an ISA or pension?
A: No, EIS investments must be made directly, not via ISAs or pensions.
Q: What if the company fails?
A: You can claim both the initial income tax relief and loss relief to reduce the blow, but you could still lose money.
Q: Where can I learn more or check current rules?
A: Start with the official HMRC EIS guide, and consider independent resources like EISA.
Next Steps: Getting Started with the EIS
If EIS sounds like a good fit for your portfolio and goals, here’s how to move forward:
Do your research—read up on EIS opportunities, company backgrounds, and platform reviews.
Speak with a financial adviser—especially if investing significant sums or you’re new to early-stage investing.
Choose your entry point—decide whether to use an EIS fund or invest directly.
Track your paperwork—keep EIS3 certificates and investment records safe.
File your claim—use your EIS3 to claim tax relief via your tax return.
Conclusion: Is EIS Right for You?
The Enterprise Investment Scheme can be a powerful way to support early-stage UK businesses while receiving substantial tax reliefs. However, the risks are higher than with mainstream investments and EIS is best suited to investors who can afford to wait and who understand the risks.
If you have a UK tax bill to offset, want tax-efficient diversification, and can stomach the risk of venture investing, EIS could be a smart addition to your financial strategy.
