Why invest in EIS?

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Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

In 2016/17 nearly £1.8 billion was invested under EIS. Demand from investors is set to rise further, as tax changes and pension restrictions continue to bite for wealthy investors.

What is EIS?

The EIS (Enterprise Investment Scheme) is designed to encourage investment in small, growing businesses. An EIS investment is money invested into companies or funds that qualify and have valuable tax advantages as a result.

So why does the government provide such incentives? The main attraction is the contribution small businesses make to the UK economy: they create jobs and generate tax. 

For experienced investors, the main appeal is the chance to invest in the newest and most exciting businesses with the added benefit of tax relief:

  1. Up to 30% income tax relief, either against this year’s tax bill, or last year’s via a carry back facility.
  2. Ability to defer capital gains made elsewhere, by investing these in an EIS
  3. Tax-free growth – no Capital Gains Tax liability if your investment does well
  4. Loss relief – if an EIS investment does not work out, it’s possible to offset losses against income or capital gains tax
  5. Inheritance tax free, provided the EIS is held for at least two years and you still hold it on your death.

The tax advantages are significant, but you should make your decision to invest based on the merits of the investment itself, not the tax benefits. Tax rules can change and tax benefits depend on individual circumstances. To retain the tax benefits of an EIS investment you need to hold it for at least three years and the investment must remain qualifying. 

Risks of EIS investment

Investing in small businesses is inherently more risky than investing in large businesses. Small firms are more likely to fail and investments can be hard to sell. This 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.

Nobody likes losing money, but as you should have received 30% initial tax relief the value of the investment has to decrease by 30% before you will be out of pocket. You can also write off 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.

Who might consider an EIS?

EIS are for wealthier and sophisticated investors who need neither access nor income from the amount they invest and can tie up their capital for the longer term. They must be able to accept the possibility of losing some or all of their investment.

 Typical EIS investors might include those:

  • with a large income tax bill
  • with a capital gain from selling a business, investment property or shares, and want to defer paying tax on that gain
  • who have received a tax free lump sum from a pension who want to reinvest the lump sum and get tax relief again
  • who are affected by reduced pension contributions and the Lifetime Allowance

    What is more, if your EIS investment allots shares before 5 April, this gives you the option of using the income tax relief against tax you've already paid in the previous tax year – this is known as “carry back”.

    Important: timings are not guaranteed. In some cases, only part of your subscription may be allotted this tax year. The details quoted below are those supplied by the providers and are subject to change. Tax rules can change and benefits depend on circumstances.

    Three EIS investments that plan to allot shares in 2018/19 tax year

    Offer Minimum investment Deadline How to apply
    Wealth Club featured offerDeepbridge Technology Growth EIS £10,000 26 March 2019 (bank transfers) Read more & apply online »
    Wealth Club featured offerAzoomee EIS (single company) £20,125 31 March 2019 Read more & apply online »
    Par Syndicate EIS Fund £20,000 31 March 2019 Read more & apply online »

    Offers marked with our gold “W” are featured offers. Find out more about how we choose.

    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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