Benefits and Risks of EIS Investments
Whilst the Enterprise Investment Scheme poses a wealth of generous advantages for venture capital investors keen to benefit from the UK's burgeoning startup landscape - similarly to its sister scheme, the Seed Enterprise Investment Scheme (SEIS) - before making any investment via the EIS, it's important that the scheme's limits and risks are also considered in a balanced manner.
Alongside EIS-eligible companies being required to hit a strict criteria to ensure the best chance of long term growth, additional tax benefits of EIS investments (including 30% income tax relief and capital gains tax exemption) can further enhance the potential for positive returns.
Though investing in startups does offer the potential for significant growth when compared to more mature routes such as private equity, with that higher growth comes higher risk. Through tax reliefs such as loss relief the EIS can minimise the potential for capital losses.
Though EIS investments sit on the higher end of the risk spectrum (and so may not make up the entirety of a portfolio), EIS opportunities exist across a broad range of industries with varying degrees of target growth, making them a powerful tool for portfolio diversification.
Whether it's through deferral relief that can push back CGT payments due from the sale of other assets, or EIS relief carry back that enables you to claim relief on the income tax paid the previous financial year, the EIS has the potential to reduce tax bills considerably.
Investing up To
UK investors can invest up to £1 million in EIS shares per tax year, rising to £2 million providing the additional capital is into knowledge intensive companies (KICs). Though this offers significant potential for capital growth, the EIS does limit investment to qualifying trades.
To promote impact investing into the next wave of transformative UK startups , EIS rules include a list of qualifying criteria to ensure eligible companies are early stage and growth-focused (such as a maximum 250 employees and less than £15 million in gross assets).
Residing in the alternative investment space, the EIS benefits from advantages including higher resistance to external volatility and stock market fluctuations, though some consider it to be more illiquid than traditional asset classes such as stocks and shares.