Watch out for The Enterprise Investment Scheme in 2022

Looking at Enterprise Investment Scheme for retirement.

Its 2022 and you may have been reviewing your retirement plans over the Christmas holidays.

One of the hot trends this year is likely to be the Enterprise Investment Scheme (EIS), which is predicted to continue to show gains over 2021, which was a pivotal year for the EIS. To date the Scheme has raised over £24 billion in funds for almost 33,000 companies.

EIS is an essential tool to accelerate the growth of the UK’s Small Medium Businesses (SMEs). The Scheme has been around since 1994 and offers generous tax reliefs to incentivise investors, helping these younger, higher-risk businesses to raise finance and an investment platform to grow.

Read on to see some of the questions that we often get asked about EIS investment and if it’s right for you.

What is the Enterprise Investment Scheme (EIS)?

The EIS is a UK government scheme designed to help small to medium businesses (SMEs) that are higher-risk, to raise finance and grow. It does this by offering tax reliefs to investors. The scheme was introduced in 1994 and is therefore a well-established part of the UK tax landscape.

Is investing in EIS a tax efficient way to save for retirement?

It can be but only after you have used up your allowances for pensions and individual savings accounts (Isas) and/or the size of your assets means that you have a large Inheritance Tax Liability. They can therefore be useful for older investors because they can be passed on Inheritance Tax Free if you have held them for two years and at time of death.

What tax relief can I expect?

You can claim up to 30% on a maximum annual investment of £1m-worth of investments, or £2m- worth if at least £1 million of that is invested in knowledge-intensive companies, such as those in the life sciences sector.

The scheme has a carry back feature so you may be able to apply for tax relief on eligible investments to the preceding tax year, as long as the limit for relief is not exceeded for that year.

Other current tax benefits include tax-free growth, capital gains deferral, Inheritance tax relief and loss relief on exit, which help to reduce the risks.

How does the Enterprise Investment Scheme differ from Venture Capital Trusts (VCTs)?

The key differences between EISs’ and VCTs’ are the tax reliefs and investment approaches.

The 30% income tax relief is the same for both but the minimum hold period for EISs is 3 years (5 years for a VCT) in order to qualify for all their tax reliefs.

What are the risks of investing?

Although you only need to hold an EIS for three years to qualify for the tax reliefs, it is unlikely that you’ll be able to exit at that point. EIS exits are generally only achieved when their managers sell a company and it could take over eight years to realise an EIS investment.

If you decide to invest in an EIS, it is particularly important to have a long-term investment horizon and not to invest money in them that you might need in the short term.

Please note that tax rules can change and benefits depend on your circumstances. EIS tax benefits are only available if the company maintains its EIS status too.

What kind of companies qualify for an EIS?

EIS investments are early stage, smaller companies with a higher risk of failure than larger, listed companies.

EIS-qualifying companies vary significantly, across a wide range of sectors and industries.

The rules are fairly specific, but essentially to qualify a company needs to carry on a trade with a view to making a profit. Some companies and sectors are excluded, for example, those that deal in land, commodities or shares, have significant asset backing or contractual revenue streams.

What returns could I expect to see?

EIS returns will be mostly in the form of capital growth, rather than dividends.

Each offer will normally indicate a target return, which is a target only and not guaranteed. Target returns vary significantly from around 1.3x to over 10x money invested.

How do I get more advice on investing in the EIS?

Please contact us to talk to one of our financial advice experts for further advice on whether investing in the EIS is right for you and your retirement planning.

Risk Warning
Any investment carries a degree of risk and your investments may decrease in value or fail. The levels and bases of taxation and reliefs can change at any time and are dependent on individual circumstances.