Enterprise Investment Schemes

An Enterprise Investment Scheme (EIS), is an investment in a single company which is unquoted and privately held. EISs were introduced to replace the similar Business Expansion Scheme that had been running since 1981. In common with the rules governing VCTs EIS companies must have no more than 50 employees and raise no more than £2 million in a 12 month period.

There are four different types of EIS; a single EIS, which is just one company, a protected EIS fund, an EIS portfolio and an EIS fund. Each of the latter three invest in different numbers of companies and vary in their level of risk.

Investing in an unquoted trading company via an EIS offers income tax relief at 20% on qualifying investments of up to £500,000 per tax year, providing sufficient income tax has been paid. In order to benefit from the tax breaks EIS investments must be held for a minimum of three years.

Investors with large capital gains may in theory shelter an unlimited amount. The rules introduced in 2006 doubled the amount of income tax relief they could benefit from - provided they still have income tax liabilities against which to set the relief.

In addition to the income tax relief Enterprise Investment Schemes offer

• Gains on disposal exempt from capital gains tax CGT.
• Income tax or capital gains tax relief on losses on disposal.
• Relief on up to 50% of the amount invested between 6 April and 5 October in any tax year may be carried back to the previous year up to a maximum of £50,000.
• Chargeable gains may be reinvested into an EIS to defer CGT.

It is also worth bearing in mind that shareholdings in EIS qualifying companies may fall outside of Inheritance Tax IHT after two years due to the interaction with Business Property Relief.

Enterprise Investment Schemes should not be entered into without careful consideration as they high risk with the possibility of losing all of your investment, and they're highly illiquid. It may be difficult or even impossible to sell them. You should seek tax advice before making any investment to ensure the availability of the relief.