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What is the Enterprise Investment Scheme all about?

21/02/2022

Some investors opt to invest in newer, younger companies, believing that the potential returns are worth the increased risk. There are many ways to invest in such companies, with one option being the Government’s Enterprise Investment Scheme (EIS). Here’s how it works, and why some investors choose this option. 

 

How does the Enterprise Investment Scheme work?

The EIS is designed as a means to encourage investors to invest in new, young high risk companies. Individual investors buy shares in companies participating in the scheme, with these businesses able to raise a maximum of £5m each year, and up to £12m in their company’s lifetime. 

Investors can invest up to £1m each year into startups that qualify for the EIS. However, this figure doubles to £2m if you choose to invest in “knowledge-intensive” companies: companies that have met EIS criteria, as well as additional criteria, including: 

  • An “innovation” condition, which states that the company must be preparing to create intellectual property that will eventually make up most of their business, or,
  • A “skilled employee” condition, where a minimum of 20% of the firm’s employees must have gone through higher education and be involved in R&D work. 

 

What are the benefits of investing in the EIS?

One of the main benefits in investing in the EIS comes in the form of various tax reliefs. These include up to 30% income tax relief, Capital Gains deferral, inheritance tax relief and more. Investors can also offset any losses they make against their earnings, which offers some protection should the business fail. 

Target returns can also be high, tending to range from 1.3x to more than 10x money invested. However, these investments are not without their risks. 

 

What are the downsides of investing in the EIS? 

By their very nature, startups are high risk companies in which to invest. Generally, those with higher target returns tend to be higher in risk than EIS businesses offering target returns at the lower end of the scale. Because of the volatility of these investments, they are seen by many as a long-term, rather than short-term, choice. 

This is especially true when you consider the tax reliefs on offer. In order to benefit from tax relief, an EIS investor must hold their investment for a minimum of three years – and the company must remain qualified as an EIS company for the same period. Fees may also vary from company to company. 

Since 1993, the Enterprise Investment Scheme has been used as a means of bolstering younger UK businesses. Done right, both startups and investors alike can benefit – but it’s vital to understand the risks involved before investing. 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

 

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