Short answer
EIS works by giving investors tax reliefs in return for buying new shares in qualifying small companies. A company raises money by issuing shares, confirms its EIS status to HMRC, and gives investors an EIS3 certificate. Investors then claim 30% income tax relief and must hold the shares for at least three years to keep it.
The basic mechanism
EIS is a trade-off. The government accepts lower tax receipts so that investors are encouraged to back smaller, riskier companies. In return, investors must buy newly issued shares (not existing ones), pay in cash, accept full risk and hold the shares for a minimum period.
Step 1 — The company checks it qualifies
A company must meet HMRC's conditions on its trade, size, age, independence and use of funds. Many companies apply to HMRC for advance assurance before raising money. Advance assurance is optional and is HMRC's opinion based on the information supplied; it does not guarantee relief.
Step 2 — The investor subscribes for new shares
The investor subscribes directly, through a crowdfunding platform, or via an EIS fund or portfolio service. The shares must be full-risk ordinary shares with no preferential rights to assets on a winding up, and must be fully paid in cash at the time they are issued.
Step 3 — The company uses the money
Money raised must be used for a qualifying business activity, for growth and development, and spent within two years of the share issue (or of the start of trading, if later). It cannot be used to buy shares in another company.
Step 4 — Compliance and the EIS3 certificate
Once the company has traded for at least four months, it submits form EIS1 to HMRC. If approved, HMRC issues the company with authority to send each investor an EIS3 certificate showing the amount invested and the share issue date.
Step 5 — The investor claims relief
With the EIS3, the investor claims 30% income tax relief through Self Assessment or by sending the claim form to HMRC. Relief can be set against the tax year in which the shares were issued or carried back to the previous tax year.
| Illustration | Amount |
|---|---|
| Investment in qualifying EIS shares | £20,000 |
| Income tax relief at 30% (if the investor has enough income tax liability) | £6,000 |
| Net cost after income tax relief | £14,000 |
Illustration only. Relief is limited to the income tax you owe and depends on your circumstances.
Step 6 — Holding the shares
For at least three years the investor must keep the shares and must not become connected with the company or receive value from it. The company must also keep qualifying. If these conditions are broken, relief can be withdrawn.
Step 7 — Exit
An exit usually depends on a sale of the company, a listing or a share buy-back, and may take many years or never happen. If the shares are sold for a gain after three years, the gain can be exempt from CGT. If they fail, loss relief may reduce the net loss.
See also the EIS investment process.
Frequently asked questions
How long does it take to get an EIS3 certificate?+
The company cannot submit its EIS1 until it has traded for four months after the share issue, and then HMRC must process it. In practice it often takes several months after investing.
Can I buy existing EIS shares from another shareholder?+
No. EIS relief is only available on new shares subscribed for directly from the company.
Sources
- GOV.UK — Venture capital schemes: tax relief for investors
- GOV.UK — Venture capital schemes: apply for the Enterprise Investment Scheme
- GOV.UK — Enterprise Investment Scheme: income tax relief (HS341)
Tax rules can change. The information on this website is general information only and is not personal financial, investment, tax or legal advice. It does not take account of your individual circumstances. See our editorial policy.
Interested in EIS investing?
If you are a high-net-worth, sophisticated or professional investor, you can request investor information from us.
Capital at risk. EIS investments are high risk and illiquid. Tax reliefs depend on individual circumstances and qualifying conditions.