What is the Enterprise Investment Scheme?

Mary McMahon
Mary McMahon

The Enterprise Investment Scheme (EIS) is a program in the United Kingdom to encourage people to invest in small, unlisted companies. Such investments carry substantial risk and the government tries to sweeten the deal with tax benefits to make investment appealing. This increases available capital for small companies, allowing them to expand and promoting economic growth. For investors, participating in the Enterprise Investment Scheme can come with a number of useful benefits.

Man climbing a rope
Man climbing a rope

When investors participate in the Enterprise Investment Scheme, they must do so with qualifying companies. In the year they purchase shares, up to 20% of the subscription value can be used to offset income tax liability. In addition, investors may be eligible for deferrals on capital gains tax on certain assets. If the shares are held for at least three years, when they are sold, the investor will not incur capital gains taxes on the sale; this encourages people to hold on to shares.

Companies have certain responsibilities under the Enterprise Investment Scheme. People cannot claim tax benefits without paperwork sent by the company, and the company also needs to abide by certain filing rules to remain eligible. Certain companies may not qualify and investors are exempted from the scheme if they own more than 30% of the company or have a personal connection, such as being close relatives of the company president. These measures prevent abuse of the Enterprise Investment Scheme.

There are substantial risks to investing in small companies not yet listed on the stock market. The risk of stock devaluation is much higher, as the company may fail or not grow as expected. These risks have to be carefully weighed when considering participation in the Enterprise Investment Scheme, and people should also check on the minimum investment requirements for a given year, as well as the maximum tax benefits available. As with other investment activities, it is a good idea to diversify investments to distribute risk across an investment portfolio and limit losses.

The government provides detailed information about the Enterprise Investment Scheme, including the rules companies have to follow. It is advisable to review this information before investing, as regulations can change and there may be important information for investors. Investors should also verify the qualified status of a company before moving forward with an investment, as they will not receive credits for investing in unqualified companies and will be subject to normal tax rates.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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