Enterprise Investment Scheme (“EIS”) Print

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

An individual is entitled to claim EIS income tax 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 of the shares to the third anniversary following the 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 income tax 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. From 6 April 2018 the investment limit was doubled to £2m provided that anything above the existing £1 limit is invested in knowledge-intensive companies.

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 2021/22 may be carried back to 2020/21. 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 2015 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 2021:

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. This is discussed in the section on EIS Deferral Relief.

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, money lending, debt factoring, hire-purchase financing or 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;
  • Shipbuilding;
  • Producing coal;
  • Producing steel;
  • 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;
  • Generating or exporting electricity or making electricity generating capacity available;
  • Generating heat or subsidised production of gas or fuel;
  • Generating any form of energy not within the two immediately preceding categories;
  • Producing 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.

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. For shares issued on or after 18 November 2015 the limit is 500 where the issuing company is a knowledge intensive company.
  • A qualifying company can raise up to £5m under EIS in any year, and  up to £12m during its lifetime. If the company is a knowledge-intensive company, it can raise up to £10m in any one year, subject to an overall limit of £20m.  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.
  • A knowledge intensive company is broadly a company whose costs on research and development or innovation are at least 15% of its operating costs in at least one of the past 3 years, and the company meets one of the following conditions:
    • The company has created, is creating or intends to create intellectual property; or
    • The company’s full time employees with a relevant Masters or higher degree who are engaged in research and development or innovation comprise at least 20% of the total of its full time employees.  This condition must be met throughout the period of 3 years beginning with the date of issue of the shares.

Companies must raise their first investment under EIS, VCT or other risk finance investments within 7 years of making their first commercial sale, or where the company is a knowledge-intensive company within 10 years of the last day of the accounting period during which the company’s annual turnover first reaches £200,000. Turnover of other companies within a group must also be taken into account. Any adjustments must be made on a time-apportionment basis.

The age limit also applies to any business that has previously been owned by another company. However, no age limit applies 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, and the money raised by the EIS investment is employed for the purpose of entering a new product or geographical market.

The funds raised under an EIS share issue cannot be used to purchase stocks or shares in another company, as this is not regarded as having been used for the purposes of the qualifying business activity.

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.

A further restriction to EIS, SEIS and VCT schemes was announced in the Budget on 22 November 2017 to exclude what the government perceive as abusive use of the relief. This restriction became effective from 15 March 2018 when the Finance (No.2) Bill 2017-19 received Royal Assent. Tax-motivated investments have been excluded from relief, in particular where the investment has been structured to provide a low risk investment for the investors. In particular HMRC look to see whether there is a significant risk that the investor could suffer a loss of capital which exceeds the net return after tax relief. The government have taken this route rather than exclude further trades from qualifying.

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.

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