Don't invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong. Take 2 mins to learn more.
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Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
- You could lose all the money you invest
- If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
- You are unlikely to be protected if something goes wrong
- Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here.
- Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
- You won’t get your money back quickly
- Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
- The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
- If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these.
- Don’t put all your eggs in one basket
- Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
- A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
- The value of your investment can be reduced
- The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
- These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.
If you are interested in learning more about how to protect yourself, visit the FCA’s website here.
Important: The information on this website is for experienced investors. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value: you could lose all the money you invest. Tax rules can change and benefits depend on circumstances.
Key EIS facts
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What kind of companies qualify for EIS investment?
EIS-qualifying companies vary significantly, across a wide range of sectors and industries.
The rules are fairly specific, but essentially to qualify a company needs to carry on a trade with a view to making a profit. Some companies and sectors are excluded, for example, those that deal in land, commodities or shares. Companies that have significant asset backing or contractual revenue streams have most recently been excluded.
Furthermore, there are restrictions on a company’s age and size (knowledge-intensive companies enjoy a preferential treatment).
Whilst the list of exclusions is fairly long, it does leave huge scope for investors.
What are 'knowledge-intensive' companies?
Broadly speaking, the expression refers to young and innovative businesses heavily investing in Research & Development. So, for instance, a company which is developing a new drug or treatment would likely fall under this umbrella. A chain of shops opening new sites most likely won’t. Read more on knowledge-intensive companies »
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What are the tax advantages of EIS investments?
You can benefit from a mix of upfront and ongoing EIS tax reliefs:
- Up to 30% income tax relief
- Tax-free growth
- Capital gains deferral
- Potential for inheritance tax relief
- Loss relief on exit
Please remember: tax rules can change and benefits depend on your circumstances. EIS tax benefits are only available if the company maintains its EIS status.
How much can I invest in EIS?
The maximum amount you can invest is £1 million per tax year or £2 million, providing anything above £1 million is in 'knowledge-intensive' investments. In theory, it’s possible to invest more. You wouldn’t qualify for income tax relief and tax-free growth on the excess, but would still qualify for capital gains deferral and IHT relief.
The minimum investment will vary depending on the investment manager, but it is typically in the region of £10,000.
Single company or portfolio?
There are two ways to invest in EIS: by investing directly in a single EIS-qualifying company or by investing through a fund manager that builds up a portfolio for you.
Both options could have a place in an experienced investor’s portfolio.
Investing in a single company gives an investor greater visibility and control, but also carries greater risks because the success of your investment depends solely on the fortune of that company. Remember, many EIS-qualifying companies fail.
Investing in an EIS fund affords you some diversification, usually within an area or sector. It also gives you the comfort that a professional manager is researching the opportunities and makes the investment decisions for you. That said, some or all of the portfolio companies could fail and you could lose money.
With an EIS fund, you have far less control and visibility over where your money is invested. Moreover, the fund manager’s expertise comes at a price, so investing in a managed portfolio tends to be more expensive than investing in a single company.
Please remember: all EIS investments are high risk and are only suitable for experienced investors.
When will I be able to claim EIS income tax relief?
The date your shares are allotted (not the date you invest) will usually determine the investment date for tax purposes.
You can claim income tax relief after your shares are allotted and you receive your EIS3 certificate, which can take around six months to be produced.
For knowledge-intensive approved funds the position is different. The tax relief can be claimed for the tax year the fund closes, but only once you’ve received the EIS5 certificate, which may be up to 24 months after the fund closes.
When will my shares be allotted, so I can claim tax relief?
EIS funds tend to be evergreen and shares will typically be allotted over the year, but it can take 12-18 months from when you invest.
Single company investments that qualify for EIS often have a closing date – this can be either a set date or, more commonly, the point at which the fundraising target is met. Shares are normally allotted soon after the offer closes.
For knowledge-intensive approved EIS funds, the investment date for income tax purposes is the date the fund closes. See how to claim EIS tax relief »
What is EIS carry back?
EIS investments offer a 'carry back' facility. You can elect for all or part of your EIS shares acquired in one tax year to be treated as though they had been acquired in the previous tax year.
This gives EIS investors the option to offset the tax relief against income tax from the previous year.
You can only do this if you have sufficient EIS allowance in the tax year to which you’re carrying back.
What returns could EIS investments offer?
Unlike VCTs, any EIS returns will be mostly in the form of capital growth, rather than dividends.
Each offer will normally indicate a target return, which is a target only and not guaranteed. Target returns vary significantly from around 1.3x to over 10x money invested. Higher target returns often indicate higher risks.
What are the charges?
EIS fees vary widely and it is important to read this section of each EIS offer document carefully. Individual EIS companies may not levy any explicit charge, but administrative and other fees may be deducted as part of the costs of running the business. Managed portfolios of EIS investments may typically levy an initial fee of between 2% and 5%, and annual fees of 2%. They may also have a performance fee.
How can I buy EIS investments?
Unlike VCTs, EIS investments are not traded on the stock market. Typically, you invest through a broker, such as Wealth Club.
There are many EIS offers available – both individual companies and EIS funds. EIS funds can be evergreen, so you could invest any time. Individual company offers tend to have a fundraising target. When that is achieved, the offer will typically close.
How can I sell my EIS investment?
As EIS shares are not usually traded on the stock market, you cannot sell them the way you would sell an investment trust. Instead, it is the managers’ responsibility to design an exit strategy that allows them to return capital and any tax-free growth to investors.
The manager will usually give an indication of the targeted exit strategy and timeframe (typically at least four years) at the outset. Common strategies include management buy-outs, trade sales or refinancing. However, there are no guarantees.
Please note, EIS are long-term investments. The minimum holding period to retain the income tax relief is three years but you should expect to hold the share for considerably longer than this.
What is EIS Advance Assurance?
This is a service offered by HMRC companies planning to raise money under EIS may choose to use (it’s not a requirement).
If a company has received Advance Assurance it means it has received a letter from HMRC confirming the company's proposed share issue would qualify for EIS tax relief, based on the information the company provided.
Advance Assurance does not guarantee the company will qualify for EIS tax relief. This can only be confirmed after the company has issued the shares.
Irrespective of whether the company has received (or applied for) Advance Assurance, after it issues the shares it must submit a compliance statement to HMRC. At that point, if all the requirements are satisfied, HMRC will confirm the company is authorised to issue EIS certificates.
What are the key risks of EIS investments?
As with all investments, your capital is at risk.
However, as they invest in small companies, this risk is greater with EIS than with other investments. Small companies are more volatile and more likely to fail than their larger counterparts. So, you could lose all the money you invest.
For this reason, EIS investments are long-term investments and are not for everyone. They are for high net worth or sophisticated investors who have no need for immediate liquidity and are able to withstand a potential total loss.
In addition, as there is no recognised market for these shares, EIS investments are less liquid than stock market investments and they will be harder to sell.
Lastly, to retain all the tax reliefs available, you must hold the investment for a minimum period of three years and the companies must retain their qualifying status. Otherwise, you may have to pay back the income tax relief you have received.
Please remember, all the tax and product rules mentioned here are those currently applying but could change in future. Tax benefits depend on circumstances.
Who might consider investing in EIS?
EIS investments are for experienced or wealthy investors, as part of a diversified portfolio.
They could be particularly attractive to investors with a large income tax bill who are looking for growth opportunities. The EIS allowance is one of the most generous.
EIS could also be appealing to investors with capital gains tax liabilities, as explained on the EIS tax relief page.
Read more on... 
Find out the key facts about EIS: what they are, how they work and where they invest. You can also see how EIS tax relief works, how to claim it and how to make single-company investments, many of which qualify for EIS tax relief.
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