A Beginner’s Guide to Investing in the EIS

The Enterprise Investment Scheme (EIS) is an attractive option for investors seeking tax-efficient investment opportunities while contributing to the growth of the UK’s economy. With tax benefits that include up to 30% income tax relief and various other perks, the EIS offers both financial incentives and the chance to support innovative businesses.

If you’re considering investing through the EIS, here’s a step-by-step guide on how to get started.

What Makes EIS So Attractive?

The EIS isn’t just about generous tax reliefs. In addition to the ability to claim 30% income tax relief, EIS investments also offer the following advantages:

• Capital Gains Tax Exemption: You can dispose of your shares without paying capital gains tax.
• Capital Gains Tax Deferral: You can defer capital gains tax on profits from the sale of assets by reinvesting into EIS-eligible companies.
• Loss Relief: If the business you’ve invested in fails, you can claim loss relief on the investment.
• Inheritance Tax Relief: EIS investments can be passed on free of inheritance tax if held for at least two years.

These tax advantages, combined with the opportunity to diversify your portfolio and invest in high-growth start-ups, make the EIS an appealing option, especially in the context of the post-COVID-19 recovery.

Finding EIS-Eligible Investments

Before you can begin investing, you need to find EIS-eligible companies. There are two main ways to invest:

1. Direct Investment: You can invest directly in individual EIS-eligible companies. This route gives you control over your investments and allows you to tailor your portfolio to your interests and investment goals. However, it requires more research and decision-making on your part.
2. EIS Fund: If you prefer a more hands-off approach, investing through a fund might be a better option. A fund manager will build and manage a portfolio of EIS-eligible companies for you, which can offer diversification with less effort on your part.

If you’re not sure which option suits your needs, it’s always a good idea to consult an independent financial advisor.

Verifying EIS Eligibility

Not every business qualifies for EIS investment. To ensure the company you’re interested in is eligible, check that it meets the following criteria:

• The company must be unquoted.
• It must have fewer than 250 full-time employees.
• Its gross assets must be under £15 million.
• The business must be within seven years of its first commercial sale.

Certain industries, like financial services, exporting energy, and leasing activities, are not eligible for EIS funding. Make sure to verify eligibility before committing your investment.

Choosing the Right Investment

With so many EIS-eligible start-ups out there, picking the right one can feel overwhelming. If you’d prefer a guided approach, consider investing through a managed fund. However, keep in mind that funds often come with management and performance fees.

For those who want more control, here are some tips for selecting the right EIS investment:

• Sector Knowledge: Consider investing in a sector you are familiar with or passionate about.
• Business Model: Assess the company’s business model and the expertise of its team. Are their plans realistic? Does the team have the skills needed for success?
• Exit Strategy: EIS investments typically require you to hold your shares until the company is sold, liquidated, or listed. Make sure the company’s exit strategy aligns with your financial goals and investment horizon.

By evaluating these factors, you can make an informed decision and choose investments that align with your values and financial objectives.

After Making the Investment

Once you’ve invested in an EIS-eligible business, your focus will shift to managing the tax implications. After the company has been trading for four months, and your investment has been processed, you will receive an EIS3 certificate. This certificate is crucial for claiming your tax relief through the self-assessment process.

Conclusion

The EIS offers a compelling opportunity for investors looking to diversify their portfolio, reduce tax liabilities, and support early-stage companies. Whether you choose to invest directly or through a managed fund, the scheme provides a range of tax incentives that can significantly enhance the value of your investment. By carefully selecting eligible companies and aligning your choices with your financial goals, you can make the most of the opportunities the EIS offers.