Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is a government initiative for business startups, which is designed to help startups get investment. They work by offering tax relief to potential investors. EIS is targeted at more established businesses to allow them to grow.

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The scheme works by offering tax relief for investors buying new shares in the business. The incentives are as follows: 

 

  1. Investors can claim 30% of their investment back for income tax relief. For example, if an investor bought shares for £20,000, they would be able to claim back £6,000 from income tax.

  2. If an investor sells the shares after having owned them for over three years, they will be exempt from capital gains tax. 

  3. If an investor has owned the shares for over 2 years, the shares will not be subject to Inheritance Tax.

  4. If an investor makes a loss on their investment, they can also offset this against income tax. For example, if an investor pays 45% income tax, they can get 45% of investment loss back. Therefore, if an investment of £10,000 reduces to £5,000, an investor in this tax bracket will be able to claim £2,250 off their income tax.

  • The company cannot have more than £15 million of gross assets before  any shares are issued (or not more than £16 million immediately after the scheme).

  • The investment must be within 7 years of the company's first commercial sale, or 10 years for knowledge intensive companies (Check the government website to see if you qualify for a knowledge intensive company).

  • The company must have less than 250 full-time employees.

  • The company can only raise £5 million per year through the EIS scheme (maximum of £12 million overall).

  • Investors can only invest a maximum of £1 million per year under the EIS scheme.

  • They must be a taxpayer in the UK.

  • They must hold onto the shares for at least 3 years.

  • Must not be connected to the company they are investing in (ie be an employee).

For it to qualify as an EIS investment, the money raised must be used for a qualifying business activity. This could be:

 

  • A qualifying trade (these are defined on the government website).

  • Preparing to carry out a qualifying trade.

  • Research and development for a qualifying trade.

 

The money raised by the new share issue must also:

 

  • Be spent within 2 years

  • Not be used to buy all or part of another company

  • Be used to grow or develop your business

While EIS may not benefit the company directly, it provides a great incentive for investors looking to buy new shares in the company. This will help build capital to help your business expand and grow in the market.

As a startup you can get advance assurance that you are eligible for EIS funding. This is useful so that investors know that you can definitely offer these tax breaks to the investors. To get advance assurance you need to submit an application to HMRC.

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