What is the Enterprise Investment Scheme?

An EIS is a government-backed initiative offering tax reliefs to investors who buy new shares in qualifying early-stage businesses with high growth potential. Typically, they involve a higher degree of risk than investments in larger companies, such as those traded on the London Stock Exchange.

EIS reliefs
  • 30% upfront income tax relief on investments up to a £1 million for the current tax year and/or £1 million carried back to the previous tax year, as long as you keep the EIS shares for at least three years
  • 100% inheritance tax relief after two years, provided you still have your EIS shares at the time of your death
  • Capital gains tax deferral for the life of your investment
  • Tax-free growth, provided you qualify for income tax relief
  • EIS shares have to be held for a minimum of three years.
EIS benefits and rules

Enterprise Investment Schemes offer several tax benefits to encourage investment into higher-risk companies. 

  • Income tax credit - 30% income tax credit on investments of up to £1 million each year 
  • Tax-free growth - When investors sell EIS shares, any growth in value from an investment is 100% tax-free.  To qualify for the relief, income tax relief must have already been claimed - and not withdrawn by HMRC 
  • Investors have to hold the shares for at least three years
  • The company must remain EIS-qualifying for at least three years.

What is difference between an EIS and VCT?

When comparing the tax advantages of a Venture Capital Trust (VCT) with an Enterprise Investment Scheme (EIS), both are viable options in financial tax planning and it will be dependent on the nature of an individual’s circumstances as to which is used.

VCT doesn’t offer Business Property Relief on inheritance tax or Capital Gains Tax (CGT) deferral on other gains. However, there are two areas where it is better from a purely tax perspective:

1.Higher rate taxpayer requires an income

  • Only the VCT is designed to produce an income which is via the payment of dividends
  • For example: Stuart is a higher rate taxpayer and wants to maximise his income
    • If he invests in a normal share costing 100p and paying a 5p dividend, which is equivalent to a 5% yield, after paying higher rate tax this will drop to a yield of just 3% (5 x (100-40%) = 3)
    • However, if he invested in a VCT the dividends are tax-free
    • Also, the 100p share only costs 70p because of the 30% income tax relief. Therefore, the dividend yield becomes 7.14% (100/70 x5).
    • This is much better than the 3% return outside of the VCT.

2. A fast growing asset for potential sale within three years 

  • CGT exemption is available immediately with a VCT but with an EIS it is only available after 3 years. However, it should be borne in mind that if income tax relief is required as well, then this strategy won’t work as the VCT will lose its income tax relief if held for less than 5 years.
  • For example: Shona invested £200,000 in a specialist VCT which bought unquoted shares in healthcare companies
    • She purchased the VCT in April 2011 and by June 2013 the shares were valued at £300,000
    • Shona decided to sell them and was able to find a buyer relatively quickly
    • The £100,000 gain was free of CGT due to it being invested in a VCT
    • Had the money been invested in an EIS the sale would not have qualified for CGT relief as it had not been held for 3 years.