enterprise investment scheme (eis)

the scheme works by offering tax relief for investors buying new shares in the business. the incentives are as follows: 

1. investors can claim 30% of their investment back for income tax relief. for example, if an investor bought shares for £20,000, they would be able to claim back £6,000 from income tax.

2. if an investor sells the shares after having owned them for over three years, they will be exempt from capital gains tax. 

3. if an investor has owned the shares for over 2 years, the shares will not be subject to inheritance tax.

4. if an investor makes a loss on their investment, they can also offset this against income tax. for example, if an investor pays 45% income tax, they can get 45% of the investment loss back. therefore, if an investment of £10,000 reduces to £5,000, an investor in this tax bracket will be able to claim £2,250 off their income tax.

the company:

• must be established in the uk

• cannot be trading on a recognised stock exchange when shares are issued

• cannot control another company (unless that company is a qualifying subsidiary)

• is not controlled by another company, or does not have more than 50% of its shares owned by another company

• is not expecting to close after completing a project or series of projects

• cannot have more than £15 million of gross assets before  any shares are issued (or not more than £16 million immediately after the scheme), and

• must have less than 250 full-time employees

please note that the company can only raise £5 million per 12-month period through the eis scheme or other investment schemes (ie seed enterprise investment scheme (seis), venture capital trusts, social investment tax relief or state aid approved under the risk finance guidelines). further, a company can only raise £12 million overall from these schemes in its lifetime. 

the investment must also be within 7 years of the company's first commercial sale, or 10 years for knowledge-intensive companies. check the government website to see if you qualify for a knowledge-intensive company.

investors:

• can only invest a maximum of £1 million per year under the eis scheme

• must be a taxpayer in the uk

• must hold onto the shares for at least 3 years, and

• must not be connected to the company they are investing in (ie be an employee)

for it to qualify as an eis investment, the money raised must be used for qualifying business activity. this could be:

• a qualifying trade (these are defined on the government website)

• preparing to carry out a qualifying trade

• research and development for a qualifying trade

the money raised by the new share issue must also:

• be spent within 2 years

• not be used to buy all or part of another company

• be used to grow or develop your business

while eis may not benefit the company directly, it provides a great incentive for investors looking to buy new shares in the company. this will help build capital to help your business expand and grow in the market.

as a startup, you can get advance assurance that you are eligible for eis funding. this is useful so that investors know that you can definitely offer these tax breaks to investors. to get the advance assurance you need to submit an application to hmrc.