EIS: an investment scheme for the sophisticated investor

You may not have heard of the Enterprise Investment Scheme, even though it has been around for 22 years. In simple terms, it’s a scheme offering big tax advantages for investing in UK early-stage businesses. It’s one for the sophisticated investor though, as investing in start-ups and new companies comes with higher risks. 

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

The Enterprise Investment Scheme (EIS) was launched by John Major’s conservative government in 1994 to encourage investment into UK smaller, higher-risk companies. Investors get significant tax advantages in return for including these investments in their portfolios.

Any UK investor can apply, but the general profile of an EIS investor is someone who already has an investment portfolio and most of that will be balanced between equities, bonds or ETF structures, says Charles Owen, founder and director of CoInvestor, an investment platform providing access to the EIS. They’re seeking to add an additional element to their portfolios, like non-correlated capital growth or the tax advantages on offer, he says, and they understand the risks involved.

'These by their definition are illiquid and you have to understand that this is a high risk investment in FCA terms, which is why it is much more appropriate for sophisticated investors than general retail investors. Because they’re unlisted and these companies are growing, you’re going to hold them for three or four years, possibly more.'

There are a large number of tax advantages, including an immediate 30% income tax relief, deferment of capital gain if you are investing with a capital gain, no capital gains tax to be paid on any profit when exiting the investment, and after two years any investment in an EIS qualifying company falls outside an estate for inheritance tax purposes, Owen says. However, you must hold your investments for a minimum of three years to maintain the benefits.

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