Enterprise Investment Scheme (EIS) encourages investors to support small businesses by purchasing their shares. When someone purchases EIS shares, they get a lot of tax benefits, which is the primary reason behind the popularity of this scheme. Companies taking up this EIS investment should be capable enough to show high growth potential, failing to which they might get exempted from participation.

The idea behind selling EIS shares is that by early investment, small companies would grow and mature at a faster rate, and soon they will be able to benefit the shareholder and also the economy of the country. As small businesses grow, they will have more employment opportunities and slowly become capable of paying taxes, and thus it will be a great benefit for the country’s economy.

However, it is to be noted that EIS investments are not for everyone. It has several benefits and risks, which should be considered before planning the investment. So, let us explore all the aspects and see if EIS shares will help the current economic situation.

Benefits

EIS investments come with the following benefits:

• Investors of EIS qualifying companies can claim around 30% income tax relief based on their invested amount against their income tax figure. However, the tax relief could not be claimed if you have reached the limits in a given financial year.
• As the shares are held for a minimum of three years, there will be no capital gains during this period, which means no capital gain tax.
• Shares held in a qualified EIS investment for more than two years fall out of the investor’s estate at the point of death due to IHT purposes. This can help save around 40% of the total share value held.
• In case the investor incurs a loss, they offset up to 45% of this loss in the form of tax relief.
• You can use the present year’s EIS investment to apply for relief on the previous year’s income tax bill.
• If you have claimed income tax relief and the company remains EIS-qualified, you would not have to pay CGT on exit.

Risks

As there are so many benefits, there are some risks too. Investing in smaller companies always has greater risks than investing in larger companies. Due to the high investment risks, the government offers so many benefits to EIS investors. The relief would soften the blow in case of mishaps and encourage investors to come forward. But you should only invest when you have faith in the company’s growth potential. Do not get lured by the tax benefits, as you may lose money.

Some industries have performed quite well in the past, and investing in companies belonging to those industries can be a good idea. You should research to understand EIS-qualified companies’ growth potential before investing in them.