What is the EIS, and should you invest in it?

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The Enterprise Investment Scheme, or EIS, was set up by the UK government in 1994. But why was it launched, how does it work and what are the advantages for investors?

What is the EIS?

The EIS was created to incentivise investment into UK startups, to close the funding gap faced by young companies and to make the UK more attractive to investors. Since its creation it has grown steadily and according to HMRC’s latest figures, it has helped 32,965 individual companies raise more than £24bn.

Naturally, because the investments are made into fledgling businesses, they are high risk. But despite this, and in part thanks to the 2018 reduction in pension allowance, the EIS has established itself as a popular, tax-efficient investment opportunity that offers investors a higher investment allowance and a diversified portfolio with the chance for significant returns.

What are the risks?

EIS investments are high risk. A high proportion of startups do not hit their expected growth targets, and many fail completely. Data from Fundsquire shows that 20% of UK businesses fail in their first year and around 60% go bust within their first three years.

What are the benefits?

To counterbalance the risk, EIS-qualifying investments reward investors with a suite of generous tax breaks, including 30% income tax relief on up to £1m invested. This rises to £2m if the investments are made in knowledge-intensive companies (KICs). With unapproved funds, qualifying investments can be ‘carried-back’, allowing the investor to treat them as though they were made in the previous year, and applying tax reliefs from that year, effectively doubling their allowance.

In addition to income tax relief, the EIS also offers capital gains tax deferral, inheritance tax relief, and loss relief for investments in companies that fail.

Is EIS right for you?

EIS investing is best suited to investors who have a high income tax bill and stand to benefit from the high annual allowance that EIS offers. It should not be used as a replacement for traditional pensions and retirement planning, however, it can offer an excellent tax-efficient facility alongside traditional pensions, particularly if you have met your pension allowance for the year. Because small companies follow different investment cycles, EIS investments can also offer an additional degree of portfolio diversification. Many EIS funds have a relatively low minimum investment, in some cases as low as £5,000,

Investments made in startups through EIS have significant growth potential, with many funds targeting returns of between 3-10X. For investors who are happy with high risk investments, they offer a chance to support companies that, in many cases, are working at the cutting edge to develop new technologies, advanced approaches to healthcare and drug discovery, sustainability measures and more, meaning your investment could help to make an impact.

Finally, the EIS scheme has already helped to foster the creation of a flourishing startup ecosystem in the UK, enabling an increasing number of entrepreneurs and the latest generation of talent to put their ideas in motion. Across the board, from job creation to the development of specialised skill pools, the effect is a net positive for the UK economy.

If you would like to know more about the benefits of EIS investing, or look at opportunities around investing in startups, visit SyndicateRoom