Enterprise Investment Scheme (EIS) Investing

As you will remember, Rachel Reeves’s budget of October 2024 felt like an earthquake! In particular:

• With effect 6th April 2025, Employers’ NIC increased from 13.8% to 15%
• With effect 6th April 2026, the 100% relief from Inheritance Tax (IHT) for farmers and shareholders in qualifying trading companies (must have been held for at least 2 years) is capped at £1million of combined qualifying assets. Any value above £1 million gets just 50% relief, effectively creating a 20% IHT rate on the excess.
• With effect 6th April 2027, all defined contribution pensions – e.g. workplace pensions and Self Invested Personal Pensions (SIPPs) - will fall to be included in the deceased person’s estate and become liable to IHT.

I said in my last post that I would concentrate on advising clients on the attractions of three legitimate ways of reducing UK tax. Firstly, Enterprise Investment Schemes (EIS), secondly Venture Capital Trusts (VCT) and thirdly a relatively lower risk vehicle suitable for Inheritance Tax planning only. They are different - and quite difficult to grasp, - so I am going to devote a separate article to each of the 3 tax planning vehicles. Firstly, I look at EIS.

What is EIS?

The EIS is a well-trodden UK government scheme designed to help smaller higher risk trading companies raise finance by offering significant tax reliefs to investors. It incentivises investment into the engines of the UK economy, enabling start-ups and scale-ups to secure the patient, long-term capital they need to innovate and grow. I summarise the tax benefits of EIS investing below:

1.      Income Tax Relief

• Investors can claim up to 30% income tax relief on the amount invested.
• The maximum annual investment limit for relief is £1 million, or £2 million if at least £1 million is invested in knowledge-intensive companies.

2.      Capital Gains Tax (CGT) Exemption

• No CGT is payable on any profits made from EIS shares held for at least 3 years.

3.      Loss Relief

• If the investment fails, investors can offset the loss against income tax or capital gains tax.
• This can significantly reduce the effective cost of the investment.

4.      Capital Gains Deferral

• Capital gains from other assets can be deferred if reinvested into an EIS – qualifying company.

5.      Inheritance Tax Relief

• EIS shares are usually exempt from IHT after 2 years under Business Property Relief (BPR).

Who might be interested?

• Those who pay a lot of tax
• Those who have an adventurous risk appetite

EIS Illustration

Here is an illustration of the tax benefits of EIS investing:

Let us assume in a simplified example you have an investment portfolio worth £1m (cost £500,000) held in a general investment account. You cannot sell any of it without paying capital gains tax at the new rate of 24% for higher rate tax payers. You would like to commit 5% of your portfolio - £50,000 - into a higher risk EIS qualifying investment. Here are the tax benefits:

• You will receive relief from income tax of up to £15,000 (30% x £50,000) via your tax return as your investment is deployed into portfolio companies by the EIS provider.
• You will defer paying your CGT bill of £6,000 (£25,000 x 24%).
• After 3 years of holding your EIS qualifying shares, any capital gain from your EIS investment, will be entirely free from CGT. (However the deferred gain will become due)
• If you sell your EIS qualifying shares at a loss, this loss can be offset against your income. For example, a loss of £20,000 for a 45% income taxpayer will save income tax of £9,000 (45% x £20,000).
• Should you die in possession of your EIS qualifying shares and you have owned them for more than 2 years, the value of these – up to £1 million - will be entirely free from 40% IHT and anything more than £1 million will pay the reduced rate of IHT (20%).

Risk and what you can lose if the investment becomes worthless

As tax rates increase, and legislative changes come into sharper focus - such as the planned IHT reforms (from April 2026) and the lower CGT limits - the relative appeal of tax-advantaged investments is becoming more evident. The trade-off between the potential investment risk versus the certainty of an increased tax burden is shifting; such that these vehicles become attractive not just to the “adventurous” but also to those with a more circumspect attitude to risk.

The FCA insist that EIS providers must say in their literature that “You could lose all your money”. Thanks to the generous tax reliefs that apply to an EIS investment, this is not quite true. We have calculated that depending on your status as an income taxpayer, the worst-case scenario  - using the £50,000 original EIS investment as the example:

You could lose

£28,000 (56%) as a basic rate taxpayer,

£21,000 (42%) as a 40% income taxpayer and

£19,250 (38.5%) as a 45% income taxpayer.

Conclusion

EIS investing has become more popular since Ms Rachel Reeves announced the withdrawal of IHT relief for personal pensions. However, because EIS is higher risk - even with its generous tax reliefs - we would not normally recommend that you invest more than 5% of your portfolio in these.

We know good EIS specialists who will typically hold a portfolio mix of carefully chosen EIS companies (diversification). Oxford Capital set a target rate of 2.5% fund target. For example, an investment of £100,000 (net £70,000) is targeted to yield a tax-free return after 7 years of £250,000. But remember, this is a high-risk investment and there are no guarantees. To further diversify the risks, we recommend investing in two EIS funds rather than one.

Andrew Hamilton CTA Dip PFS

September 2nd 2025

Postscript 1

Oxford Capital kindly set out for us an example of one of their investors ‘EIS Journey.’ This is set out in Appendix 1.

Please note that the Moneybox example (a 17x return!) is unusual. Oxford Capital target a 2.5x return over 7 years for their fund. The fund usually has about 10 investments running concurrently at any one time.

Appendix 1 - EIS Case Study

The investor: “Thomas”

Our anonymised investor, Thomas is a 52-year-old barrister. He invested £100,000 into the Oxford Capital EIS fund to access a diversified portfolio of UK’s tech companies with high growth potential and the compelling tax advantages of the EIS. His story is told in Appendix 1, “An Investor’s Journey.”

Click HERE for the case study