Why consider EIS?
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
The Enterprise Investment Scheme (EIS) has supported over 30,000 small businesses, raising £24 billion since it was introduced in 1994. The scheme aims to encourage investors to support young, innovative companies with the potential for high growth. This type of business is key to generating jobs and supporting the UK economy.
The pandemic highlighted the importance of external finance for these businesses, with over 600,000 smaller businesses seeking external funding for the first time. Investor demand is also increasing, with 16% of UK investors looking to back early-stage businesses.
Investing in such businesses could offer the potential for attractive returns. For example, Gousto and OXYGENE™ were supported by EIS/SEIS schemes, and returned up to 27x and 20x their original investments respectively. Of course, there have also been failures, as must be expected when investing in young companies. Past performance is not a guide to the future.
Meanwhile, the generous tax reliefs available could help mitigate risk and amplify gains.
What is EIS?
EIS is available to help small trading businesses, that are either private or quoted on AIM, raise funds to support growth. There are a number of restrictions, primarily on the size of the company, for it to qualify for the scheme. Investors can choose to invest via an EIS fund or directly into a single company. If investing via a fund, monies will be deployed across a portfolio of around 5-10 companies. Investing into a single EIS-qualifying company has the potential for greater returns but carries greater risks, because of the lack of diversification.
To help compensate for this risk, there are significant tax benefits associated with the EIS investments:
- Up to 30% income tax relief is available, for shares held for more than 3 years.
- The allowance for EIS is £1 million, so there is a potential for £300,000 income tax relief. This allowance is increased to £2 million if invested into knowledge-intensive companies. These are young companies typically focused on research and development, which meet additional requirements set out by HMRC. If invested into knowledge-intensive companies, you could claim up to £600,000 in income tax relief.
- ‘Carry back’ is available, which allows you to offset tax relief against your previous year’s tax bill. This could provide tax planning advantages.
- Tax-free growth. When realizing EIS shares, you normally pay no capital gains tax.
- Defer capital gains by investing the gain into an EIS-qualifying company. Once your investment is realised you will then have to pay capital gains tax at the pre-vailing rate, or you can reinvest it to defer the gain, potentially indefinitely.
- Loss relief is available, if the value of your investment decreases.
- You can pass on an EIS investment IHT free.
Tax rules can change and tax benefits depend on circumstances.
For some, a barrier to EIS investment is the lack of liquidity. As EIS-qualifying companies are unlisted there is no ready market or facility to sell shares, so investors typically have to wait until an exit is achieved (via strategies such as management buy-outs, trade sales or refinancing). This is likely to take longer than the 3-year minimum holding period.
However, experienced investors who are able to accept the high illiquidity and long holding periods, could be well rewarded. The Enterprise Investment Scheme has been used by a number of businesses that have become highly successful.
Free factsheet: EIS at a glance.
For more information please see our simple factsheet, which gives an overview of EIS, how they work, the risks and benefits.
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Examples of recent EIS exits
Content marketing helps companies reach and build relationships with their audience through relevant and useful articles, videos, emails and social media posts.
However, managing a huge amount of content across different platforms and channels can be challenging and time consuming – ContentCal aims to change this.
Founded in 2016, ContentCal makes content creation, planning, scheduling and posting simple across websites and social channels. Streamlining that process frees up time so marketing teams can focus on the activities that add the most value. The platform has attracted customers like the NHS, Specsavers and BMW as well as many freelancers and agencies.
ContentCal was backed by two EIS fund managers - Guinness and Fuel Ventures. Fuel Ventures invested a total of £4.5 million into the business, starting in February 2020 and Guinness invested £2 million in March 2021. In December 2021 ContentCal was acquired by Adobe for $110 million in an all-cash transaction. The exit delivered realised returns of between 4.7x and 7.7x for Fuel Ventures investors, and returns of 4.27x for Guinness investors.
See Fuel Ventures EIS Funds performance track record
See Guinness EIS Fund performance track record
The Fuel Ventures Scale-up Fund is open for applications and aims to deploy capital over a 10-12 month period. The next deadline to apply is 6 April 2022, for planned deployment in the 2022/23 tax year. You should be able to claim income tax relief in the 2022/23 tax year or carry back to the 2021/22 tax year (not guaranteed).
The Guinness EIS Fund aims to deploy investors' capital within the tax year in which a given tranche closes. The next tranche close is on 30 June 2022, so investors should be able to claim income tax relief in the 2022/23 tax year or carry back to the 2021/22 tax year (not guaranteed).
Gousto is a meal-kit subscription service which supplies easy-to-follow recipes and fresh, responsibly sourced food to subscribers, with the aim to reduce food waste. The business uses automation and machine learning to optimize production efficiency and predict individual customer preferences, helping it to achieve its zero food waste goal.
Co-founders Timo Boldt and James Carter first presented their business on BBC Dragon’s Den but failed to secure backing. Since then the business has gone on to become an EIS success story, with the company achieving unicorn status in late 2020.
The MMC Ventures EIS fund first invested in 2013 and participated in multiple funding rounds. The company eventually used its entire EIS allowance and has since secured funding from leading investors including Perwyn Private Equity and BGF. Early this year, Gousto announced it had secured a further $150 million dollars in funding from SoftBank’s Vision Fund II, Barclays and HSBC. The business is now valued at $1.7 billion.
In 2020, MMC’s investors were given the opportunity to partially exit their investment, achieving realized returns of 27x their original investment. This is an exceptional return and past performance is not a guide to the future.
See MMC Ventures EIS Funds performance track record
The MMC Ventures EIS Fund is currently available and is expected to close on 30 April. MMC anticipates taking 12 to 18 months to fully deploy investor capital.
OXGENE™ is a leading synthetic biology company that provides DNA expertise and advanced platform technology to laboratories discovering antibodies and pioneering cell and gene therapies. The vision of the business was to develop DNA-building blocks that could be fitted together like Lego, simplifying genetic engineering and reducing manufacturing costs.
Established in 2011 with borrowed lab space and second-hand equipment, OXGENE is now a £-multimillion revenue business. Sales doubled three years running (from financial year 2017/18 to 2019/20), and the company achieved a £6 million in revenue in 2020.
OXGENE was backed by five of the Mercia EIS funds, with the first investing in July 2013. In March 2021, OXGENE was sold to WuXi AppTec, a global leader in the provision of R&D and manufacturing services to the pharmaceutical, biotech, and medical device sectors. The sale generated returns of between 13x and 20x investment cost for the five Mercia EIS funds. Past performance is not a guide to the future.
See Mercia EIS Funds performance track record
The Mercia Knowledge-intensive Impact EIS Fund is currently available and is expected to close on 4 April. As this is a Knowledge Intensive Fund, investors who apply by 4 April should be able to claim income tax relief in this tax year or the previous tax year (not guaranteed).
Investing in small businesses is inherently more risky than investing in large businesses, since small firms are more likely to fail. The high investment risk is one of the reasons the government offers tax benefits on EIS. The reliefs can soften the blow if things don’t work out, but amplify any gains if the firm succeeds.
EIS investments can also be hard to sell and value. In most instances, to realise an EIS investment you will need to wait until an exit is achieved, which in some cases could take over 10 years.
Nobody likes losing money, but as you should have received 30% initial tax relief the value of the investment has to effectively decrease by 30% before you are out of pocket. You can also off-set losses against either income or capital gains tax. This means in the worst case scenario – the investment fails with no recoverable assets – the maximum effective loss for a 45% taxpayer could be as little as 38.5 pence for every £1 invested. You should not invest money you cannot afford to lose. Each EIS investment opportunity should be considered based on its investment merits rather than for the tax benefits: experienced investors should form their own considered view.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
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