What is an EIS?

An Enterprise Investment Scheme (EIS) is a tax-efficient investment that was introduced by the UK Government in 1994 to incentivise investment into smaller UK companies. Investors are incentivised with relief on Income Tax, Capital Gains Tax and Inheritance Tax.

How are EISs categorised?

EISs can be categorised into three main types:

EIS Portfolio
The investor invests in a range of qualifying companies. The companies held will typically be larger than those in an SEIS. Although qualifying rules determine the companies that can be held, a range of risk is available in this investment.

Single Investment Company EIS
This is typically used by investment professionals and is where an investor invests directly into one business. This is used specifically to back companies in which the investor has a lot of confidence.

Investing into smaller businesses than a standard EIS. Additional reliefs are available as a result to compensate for the extra risk of a smaller business.

What are the rules associated with EISs?

The rules associated with EISs are:

The investment must be into new shares

The investee company must have fewer than 250 employees

The investee company must use the money raised within 24 months

Companies must be unquoted or listed on the Alternative Investment Market (AIM)

The company must not be controlled by another company

Any investment of EIS funds must not exceed more than £10 million per 12 month period

Certain trades are excluded, for example, mining and financial services companies.

For any new investments, there is an investment cap of £12 million (£20 million for knowledge intensive businesses who may also have up to 499 employees).

For any new investment, managers are no longer able to finance Management Buy-Outs or Acquisitions.

For all new investments a qualifying company must be no more than 12 years old, unless fundraise will fundamentally change business activity. The company must also have made their first commercial sale within the last 7 years.

For all new investments (as of April 2018), knowledge intensive companies must have made the first commercial sale or reached turnover of 200,000 in the last 10 years.

What are the risks associated with EISs?

The risks associated with EISs are:

Investment in smaller, unquoted companies involves a high degree of risk.

Investors may not get back any or all of their investment.

Small, thinly capitalised companies in new markets are vulnerable to performance risk, counterparty credit risk, interest rate risk, market risk, supplier and customer concentration risk and other commercial risks which might impact their performance.

Fund Manager's inability to identify appropriate Investee Companies/loss of key staff at Foresight and/or Williams might damage Fund performance.

Past performance is not necessarily a guide to future. performance and may not be repeated

Lack of liquidity for individuals to sell investments

No guarantee investments can be realised after four years

EIS relief is dependent on investee companies continuing to meet strict qualifying criteria

Tax reliefs depend on personal circumstances and government policy, both of which are subject to change 

How do I select the most suitable EIS for me?

Depending your personal attitude and approach to risk and reward, you can subscribe to one or more EIS in any one tax year.

Unlike Venture Capital Trusts (VCTs), which generally target regular tax-free dividends, most EISs offer tax-free growth. EISs are therefore typically more applicable to investors with Capital Gains Tax (CGT) and Inheritance Tax (IHT) issues.

Best InvestTax Efficient Review and M J Hudson Allenbridge, alongside several other independent websites, list existing EISs and their performance. However, past performance may not reflect future performance. Amongst other things, assessments should be made to the EIS fund manager's track record, the performance and dividend history of all its funds and the quality and experience of the management team.

When investing in an EIS, you may also want to ensure that regular updates are made on the fund's progress and that the EIS fund manager provides an investor relations service.

What are the tax benefits of investing in an EIS?

Investors in EISs benefit from the following:

Income Tax Relief
30% Income Tax relief on the amount invested. Income tax relief can be claimed against the tax year of the investment and/or the previous tax year.

Tax free growth
Growth is exempt from Capital Gains Tax.

Capital Gains Tax Deferral 
Capital Gains can be deferred from 3 years prior and 1 year post investment.

Loss Relief
Loss relief may be available at your marginal rate of tax.

100% Inheritance Tax Relief after two years
EIS shares qualify for Business Property Relief (BPR) so the investment is exempt from Inheritance Tax relief so long as it is held for 2 years at the time of your death.

How much can I invest?

The maximum amount you can invest is £1 million per tax year or £2 million, providing anything above £1 million is in knowledge intensive investments.

What are the charges associated with an EIS?

The charges associated with making an EIS investment are:

Initial start up costs

Annual Management fees

Performance fees 

When I invest in an EIS, what will happen to my investment?

Following successful receipt of your application, your funds will await deployment into portfolio companies over an investment period of 2 years.

How long must I hold EIS shares to keep the income tax relief?

You must hold EIS shares for three years from the issue date of the shares.

How do I claim EIS tax reliefs?

Income tax relief claims can be made either by completing a self-assessment tax return or by completing pages 3 and 4 of form EIS3 and returning these to HMRC.

EIS disposal and reinvestment relief claims are made by completing a self assessment tax return.

For which tax year can I claim income tax relief?

Income tax relief applies for the tax year within which the shares were issued, however, EIS rules allow for income tax relief to be carried back to the prior tax year.

You can choose how much relief they wish to claim in the current and/or preceding year.

What happens to my EIS shares if I die?

Shares in underlying companies can be transferred to another indivudal or held in the name of the estate until the opportunity to exit.

How do I sell my EIS shares and what are the implications?

As investments are in unquoted companies, there will be no readily available market for the sale of shares. As a result, the most likely mechanism for realising investments is through a realisation process. Options for making realisations and returning funds to Investors in relation to the investments will be considered after their respective Three Year Periods.

You should view your investment in an EIS as a long term investment with proceeds being received over a 4 to 8+ year window.

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Capital is at risk. The value of an investment, and any income from it, can fall as well as rise and investors may not get back the full amount they invest. EIS should be considered a longer-term investment, which may be higher risk and more difficult to realise than listed securities. Tax reliefs are dependent on investee companies maintaining EIS qualifying status and investors’ individual circumstances. Current tax rules are subject to change. Past performance is not a reliable indicator of future performance.  Foresight Group LLP does not provide advice and the information on this website should not be construed as such. We recommend investors seek advice from a regulated financial adviser. Investors should only invest in Foresight EIS funds on the basis of information contained in the [Information Memorandum] and Key Information Document.

Foresight Group LLP is authorised and regulated by the Financial Conduct Authority (FRN: 198020).