The Enterprise Investment Scheme (EIS) is a UK government initiative designed to help small and medium-sized enterprises (SMEs) raise capital by offering tax relief to individual investors who buy new shares in those companies. This article delves into the historical context, key events, types, and other important aspects of EIS.
Historical Context
The EIS was introduced in 1994 by the UK government to replace the Business Expansion Scheme (BES). It was created to encourage investment in smaller companies by providing tax reliefs to investors, thereby helping to promote innovation and economic growth.
Key Events
- 1994: Introduction of the EIS, replacing BES.
- 2011: Increased individual investment limits and broadened eligible companies.
- 2018: Introduction of ‘risk to capital’ condition to ensure EIS investments support genuine entrepreneurial activity.
Types/Categories of EIS
- Eligible Companies: Companies must be unquoted at the time of the share issue and have a permanent establishment in the UK.
- Investment Limits: Maximum of £1 million per individual per year, and up to £5 million per company per year.
- Types of Relief: Income tax relief, capital gains tax deferral relief, loss relief, and inheritance tax relief.
Detailed Explanation
Tax Reliefs Offered by EIS
- Income Tax Relief: Investors can claim up to 30% income tax relief on the amount invested, up to £1 million.
- Capital Gains Tax Deferral: Any capital gains realized on other assets can be deferred if the gains are reinvested in EIS-qualifying companies.
- Loss Relief: If the investment fails, investors can set the loss against their income or capital gains.
- Inheritance Tax Relief: Investments in EIS-qualifying companies are exempt from inheritance tax after two years.
Example of Tax Relief Calculation
Let’s say an investor puts £100,000 into an EIS-eligible company. They would get 30% of that (£30,000) deducted from their income tax bill. If the company performs well, they could sell their shares after three years without paying capital gains tax on any profit.
Importance and Applicability
The EIS is crucial for fostering innovation and supporting startups in the UK. It provides:
- Access to Capital: For early-stage companies that might struggle to secure traditional funding.
- Risk Mitigation: For investors, due to the attractive tax reliefs.
- Economic Growth: By enabling new ventures to scale and contribute to the economy.
Considerations
- Risk to Capital: Investments under EIS are inherently risky and can lead to partial or total loss.
- Compliance: Companies must comply with EIS rules and reporting requirements to maintain their status.
- Lock-in Period: Investors need to hold their shares for a minimum of three years to benefit fully from the tax reliefs.
Charts and Diagrams
pie
title EIS Tax Relief Components
"Income Tax Relief": 30
"Capital Gains Tax Deferral": 25
"Loss Relief": 15
"Inheritance Tax Relief": 30
Related Terms and Comparisons
- SEIS (Seed Enterprise Investment Scheme): Focuses on very early-stage companies, offering even more generous tax reliefs.
- VCT (Venture Capital Trust): Another UK government scheme providing tax benefits for investing in high-risk small companies, but structured differently.
Interesting Facts
- EIS has helped over 27,000 companies since its inception.
- The scheme has raised more than £20 billion for growing companies.
Inspirational Stories
Several companies that benefited from EIS have become highly successful, including fintech firm Revolut and data analytics company Black Swan.
Famous Quotes
“Small opportunities are often the beginning of great enterprises.” – Demosthenes
Proverbs and Clichés
- “High risk, high reward.”
- “Don’t put all your eggs in one basket.”
Expressions, Jargon, and Slang
- [“Tax Shelter”](https://financedictionarypro.com/definitions/t/tax-shelter/ ““Tax Shelter””): A legal strategy to minimize taxable income.
- [“Angel Investor”](https://financedictionarypro.com/definitions/a/angel-investor/ ““Angel Investor””): An affluent individual providing capital for a business start-up.
FAQs
Q: What is the minimum holding period for EIS shares to qualify for tax relief? A: Shares must be held for at least three years to qualify.
Q: Can I claim EIS relief if I am not a UK resident? A: No, only UK taxpayers are eligible for EIS tax relief.
References
Summary
The Enterprise Investment Scheme (EIS) is a pivotal tool in the UK to support economic growth through innovation and entrepreneurship. Offering multiple tax reliefs, it benefits both investors and burgeoning companies, though it requires careful consideration due to inherent risks. Its success stories and continued contributions underscore its importance in the financial landscape.
