Enterprise Investment Scheme (“EIS”) Print

EIS relief is split into two components; EIS income tax relief, and EIS reinvestment relief, which may be used to defer CGT.

An individual is entitled to claim EIS relief on subscription for qualifying shares in an EIS company, if he is not connected with the company during the designated period of 2 years before the issue to the third anniversary of issue, or if later, the third anniversary of the date the company commenced to trade.

An individual is connected with the company, and ineligible for EIS relief where he is:

An employee, partner, or director of the issuing company, or any subsidiary of the issuing company, although for these purposes if a director is unpaid, he will qualify for EIS relief.

Entitled to acquire more than 30% of the voting power of the company.

Entitled to acquire such rights, as would entitle him to more than 30% of the assets of the issuing company or any subsidiary available for distribution to the company’s equity holders.

An individual who has control of the issuing company by means other than through his shareholding in the company.

An individual who subscribes for shares in the issuing company as part of an arrangement providing for another person to subscribe for shares in another company with which, were that other company an issuing company, the individual would be connected.

In determining whether an individual controls 30% of the ordinary share capital, account must be taken of shares held by connected persons. These include the individual’s spouse, parent or remoter forebear, child or remoter issue. For these purposes, brothers, sisters, and other relatives are not taken into account.

An individual is not treated as connected with the company if he possesses, or has the right to possess, more than 30% of the loan capital of the issuing company.

An individual, who is a paid director or employee at the time the shares are issued, is unable to obtain EIS relief as he is connected with the company at that time. If, however, following the subscription for EIS shares he becomes a paid director (but not simply an employee,) then provided that the remuneration paid is at no more than a commercial rate, he will qualify for EIS relief.

Where an individual has previously qualified for EIS relief, and has subsequently become a paid director, and then makes a further subscription for qualifying shares within 3 years of the first subscription he will be entitled to EIS relief on the second subscription, notwithstanding that at the time of the second subscription he is connected with the company, subject of course to the normal qualifying criteria.

The maximum annual investment qualifying for EIS income tax relief is £1,000,000. There is no minimum investment requirement.

The rate of income tax relief is 30% of the amount invested.

Provided the qualifying shares on which EIS income tax relief is obtained are held for the qualifying period of 3 years the income tax relief is not withdrawn on their disposal. Gains on the disposal of qualifying shares are not chargeable to CGT at any time after the end of the 3 year qualifying period.

The investor may claim up to 100% of the relief as if the shares had been issued in the previous tax year. Accordingly relief on subscriptions of up to £1,000,000 during 2015/16 may be carried back to 2014/15.  The relief carry-back provisions restrict the amount of relief that may be carried back to the maximum available relief for that previous year, after taking into account any qualifying subscriptions made, and EIS relief already claimed for that year.

If a loss arises on disposal of the investment, the loss, which is based on proceeds less cost after deducting EIS relief obtained, may be used in one of three alternative ways:

The loss may be:

Set off against other gains in the year; or

Set against the individual’s income of the year of loss, or his income of the preceding year; or

Carried forward and set against future capital gains.

A claim to loss relief against income on qualifying EIS shares is not affected by the cap on unlimited reliefs. With the rates of CGT being lower than income tax, it is most likely that offsetting the loss against income will be more beneficial.


On 1 May 2012 John subscribed £200,000 for 75,000 shares in A Ltd. He obtained EIS relief of £60,000. He sells the shares at arm’s length for £100,000 in August 2015:

Disposal proceeds 100,000
Deduct Original cost 200,000
Less EIS Relief 60,000
Allowable Loss 40,000

An EIS investment may also be used to defer a gain arising on the disposal of other assets.

For an investment to qualify for EIS relief, it must be a subscription for new shares in an unquoted trading company, which if it is an overseas company, must have a permanent establishment in the UK. A company has a permanent establishment in the UK if:

It has a fixed place of business in the UK through which the business of the company is wholly or partly carried on; or

An agent acting on behalf of the company has and habitually exercises in the UK authority to enter into contracts on behalf of the company.

A qualifying trade is not defined, but trades, which are excluded from qualifying, are defined. In particular, trades which are asset-backed, and those in the financial and legal services are excluded. A list of the currently excluded trades is set out below:

  • Dealing in land, commodities or futures, or in shares, securities or other financial instruments.
  • Dealing in goods otherwise than in an ordinary trade of wholesale or retail distribution.
  • Banking, insurance, or any other financial activities.
  • Leasing, or letting or receiving royalties or licence fees.
  • Providing legal or accountancy services.
  • Property development.
  • Farming or market gardening.
  • Holding, managing, or occupying woodlands, and any other forestry activities, or timber production.
  • Operating, or managing hotels or comparable establishments (including guest houses, hostels and other establishments whose main purpose is to offer overnight accommodation with, or without catering) or property used as such.
  • Operating, or managing nursing homes or residential care homes, or property used as such.
  • Shipbuilding.
  • Producing coal.
  • Producing steel.
  • The subsidised generation or export of electricity.
  • The subsidised generation of heat or subsidised production of gas or fuel.
  • Providing services or facilities for any trade, profession, or vocation concerned with the above, and carried on by another person (other than a parent company), where one person has a controlling interest in both trades.

To the extent that the royalties received are for the exploitation of a “relevant intangible asset” the trade is regarded as a qualifying trade for EIS purposes. Relevant intangible asset is defined as an asset, the whole or greater part of which, in terms of value, has been created by the company, its parent, or subsidiary carrying on the trade.

There are various exemptions from this exclusion, in particular:

Where the generation or export are carried on by

A community interest company;

A co-operative society, or

A community benefit society.

Where the plant used to generate the electricity relies wholly or mainly on anaerobic digestion.

Where the electricity is hydroelectric power.

Anaerobic digestion is defined as the bacterial fermentation of organic material in the absence of free oxygen (excluding anaerobic digestion of sewage or material in a landfill).

With effect from 30 November 2015 further restrictions have been introduced so that the provision of reserve energy generating capacity and the generation of renewable energy which benefits from other government support by community energy organisations are no longer qualifying activities for EIS, VCT or SEIS purposes. The government has stated that all remaining energy generation activities will be excluded from these venture capital schemes from April 2016.

The issuing company must:

Meet the qualifying trading requirement throughout the period of 3 years which ends on the later of:

The third anniversary of the date of issue of the EIS shares, or

If the company was not trading at the time the shares were issued, on the third anniversary of the date on which the company commenced to trade.

The company may carry out some non-qualifying activities provided that these are not substantial, which is normally taken to mean that the activities do not account for more than 20% or more of its total activities.

Not be a subsidiary of any other company, and if it has subsidiaries, it must possess at least 51% of the issued share capital, and voting power, and must be entitled to at least 51% of the assets available for distribution in the event of a winding-up etc.

Comply with the gross asset test whereby its gross assets must not be more than £15m before the issue of the EIS shares, and must not exceed £16m immediately afterwards.

Have fewer than 250 full-time employees, or their equivalent on the date on which the EIS shares are issued.

Have raised no more than a total of £5m under the EIS, or Corporate Venturing Scheme in the 12 months ending on the date of the relevant investment. If the limit is exceeded, none of the shares within the issue which exceeds the limit will qualify for relief under either of the schemes.

The funds raised under an EIS share issue can no longer be used to purchase stocks or shares in another company, as this is no longer regarded as having been used for the purposes of the qualifying business activity.

A further anti-avoidance measure was introduced with effect from 6 April 2012 whereby shares issued with the main purpose of accessing any of the venture capital reliefs will be disqualified from relief where the benefit of the investment is either:

Passed to a person who is party to the arrangements; or

The business activities would otherwise be carried on by a relevant person.

From April 2015 further changes have been introduced to ensure that the EIS remains compliant with EU State Aid regulations. These new amendments are:

Companies must raise their first investment under EIS, VCT or other risk finance investment within 7 years of making their first commercial sale, or 10 years if the company is a knowledge-intensive company. The age limit will also apply to any business that has previously been owned by another company. However, no age limit will apply to a company where the amount of the investment raised is at least 50% of the company’s annual turnover, averaged over the previous 5 years.

In addition to the existing cap of £5m raised in the previous 12 months discussed above, there is a new overall limit that a company may raise under EIS, VCT or other risk finance investment of £12m, or £20m for knowledge-intensive companies. Any risk finance investments used by a business previously owned by another company will count towards this overall limit.

For knowledge-intensive companies the limit on employees is raised from fewer than 250 full time employees to less than 500 employees.

A knowledge-intensive company is defined as a company:

Whose costs of research and development or innovation are at least 15% of the company’s operating costs in at least one of the previous three years, or at least 10% of the company’s operating costs in each of the previous three years and either

Which has created, is creating, or is intending to create, intellectual property or

Which has employees with a relevant Masters or higher degree who are engaged in research and development or innovation and who comprise at least 20% of the company’s workforce.

The rules governing EIS relief are complex, and there are many pitfalls that need to be negotiated in all but the most straightforward cases. Specific advice should always be sought if consideration is being given to raising share equity capital in this way.

Start a Conversation

How can we help you? Please complete all fields