Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
Are you interested in investing in growing, exciting companies whilst also enjoying some great tax relief? EIS (the Enterprise Investment Scheme) is a great route to consider – particularly for those with an appetite for early-stage businesses. In this guide, our investment team here at Bure Valley Group offers an updated explanation into how EIS works. We also point out some of the risks involved, as well as aspects to EIS which can make it a good investment
We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding (for investors and founders, respectively), you can reach us via:
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An overview of EIS in 2022
The Enterprise Investment Scheme was introduced by the UK government in 1994. Its purpose was to encourage investment into the UK’s small, unquoted companies by offering investors a series of generous tax reliefs. Not only can these help boost your real returns from investing in EIS companies, but they can also mitigate some of the risks involved with early-stage investing.
Up to $5m can be raised by a company, each year, under EIS (up to a total £12m across the business’s lifetime). Certain conditions must be met by a business before it can qualify for EIS and raise money via the scheme. For instance, the company must have a permanent UK establishment and have no more than 250 full-time employees.
Gross assets must not exceed £15m in value prior to share issuance, and the company cannot be controlled by another business (e.g. 50% of the shares cannot be owned by another business). It also, itself, cannot control other companies (except “qualifying subsidiaries”) and must not be trading on a recognised stock exchange.
EIS benefits for investors
Investing in early-stage companies generally carries a higher risk of capital loss for investors. However, EIS addresses this powerfully with its tax reliefs. In particular, investors can claim 30% income tax relief on EIS investments worth up to £1m per tax year (although another £1m can be invested in “knowledge-intensive” EIS companies). So, suppose you invest £1m into a series of EIS-qualifying companies. Due to the income tax relief, this means that £300,000 can be claimed back via your Self Assessment tax return. This can be a powerful way to maximise your real returns if you use careful planning with a financial adviser.
EIS also offers capital gains tax (CGT) disposal relief on EIS shares held for a minimum of three years. This can open up powerful opportunities for tax-efficient equity investing when your EIS investments are used strategically with other tax efficient schemes/vehicles. For instance, if you have used up your £20,000 ISA allowance for the financial year (which allows for tax-free capital gains within the “wrapper”), then you could increase your EIS portfolio holdings – especially if you have also used up your £12,300 yearly CGT-free allowance. Another great aspect to EIS is that all capital gains tax can be deferred if profits are reinvested into EIS-qualifying shares.
A final, crucial tax benefit for EIS investors is “loss relief”. Here, if your EIS investment is sold at a loss (e.g. due to business failure), then you can choose to offset this loss against your income tax bill, or your CGT bill. For instance, suppose the “effective cost” of your EIS investment was £10,000 (i.e. after income tax relief is taken into account). If you later sold the shares for £2,000, this represents a £8,000 “loss”. However, if you are an Additional Rate taxpayer (45% income tax rate), then you could claim back £3,600 via the loss relief mechanism (i.e. £8,000 x 0.45).
Risks to consider
EIS is a great scheme for investors, but does not eliminate the risks entirely. Loss relief can take some of the sting out of selling EIS shares at a loss, yet doing so still hurts your portfolio. Here, it is important to have a broader risk-mitigation strategy in place which also takes your personal risk appetite into account.
In particular, it is vital to ensure appropriate diversification – not only amongst your EIS shares, but also across your wider portfolio. Spreading out your investments across different countries, markets, sectors, company types and sizes can help reduce the risks unique to each particular one. However, be mindful that too much diversification can also dilute your returns. A balance is typically needed – one which reflects your investment horizon and overall financial goals.
EIS has been available to UK-based investors since the early 1990s, yet continues to offer good risk-mitigation and investment opportunities in 2022. Even with the loss relief and income tax relief mechanisms, however, it pays to do your own due diligence and even draw upon insights from professional investor networks.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827