How to Use the Enterprise Investment Scheme: A Step-by-Step Guide
Step 1: Check if you're eligible as an investor
You can’t claim EIS relief if you’re “connected” to the company. Only eligible investors can claim EIS relief, which means you must not own more than 30% of the shares, be an employee, or otherwise meet the specific criteria set out for eligible investors.
Directors can sometimes qualify, but there are strict rules. You also need enough income tax liability to offset against your EIS relief. Remember, you can only reduce your tax bill to zero, not get a refund. This is something I learned the hard way when I first invested in an EIS company years ago.
Step 2: Find qualifying EIS companies
Look for companies that have received “advance assurance” from HMRC. This confirms the investment should qualify for EIS relief.
Many companies raise funds through EIS investment platforms or crowdfunding sites. These often pre-screen businesses to ensure they meet EIS requirements. The company's eligibility also depends on carrying out qualifying trades and not exceeding certain ownership or funding limits.
The company must be relatively small with fewer than 250 employees. Their gross assets must be under £15 million before your investment. The timing of the company's first commercial sale is also an important factor in determining EIS eligibility.
Step 3: Make your investment
When you’re ready to invest, you’ll need to buy new ordinary shares directly from the company. Buying existing shares from another investor won’t qualify for EIS relief. The ordinary shares must be fully paid and meet EIS requirements.
Keep all paperwork related to your investment. You’ll need proof of the date and amount of your initial investment, as well as documentation of when the company received investment, to ensure EIS compliance. The minimum investment period is three years. Plan your finances accordingly before committing your money.
Step 4: Wait for your EIS3 certificate
After you’ve invested, the company must submit an EIS1 form to HMRC. If approved, HMRC will issue EIS3 certificates, also known as EIS certificates or compliance certificates, to the company to pass on to you.
This process typically takes 2-3 months, though it can sometimes take longer. The certificate includes a unique investment reference, which you will need when claiming your tax relief. You can’t claim your tax relief without this certificate. Some companies are more efficient than others at handling this paperwork. It’s worth asking about their track record before investing.
Step 5: Claim your tax relief
Once you have your EIS3 certificate, you can claim your income tax relief. Most people do this through their Self Assessment tax return. In some cases, such as when claiming deferral relief or loss relief, you may need to complete a claim form and submit it to HMRC along with your EIS certificates. You can claim relief for the tax year in which you made the investment.
Alternatively, you can carry it back to the previous tax year if that’s more beneficial. Additional tax benefits available through EIS include deferral relief, which allows you to defer capital gains tax by completing the relevant claim form, and loss relief, which lets you offset investment losses against your income tax to reduce your overall tax liability. You have up to five years after the 31 January following the tax year of your investment to claim the relief. Don’t leave it too late.
Step 6: Hold your investment for at least three years
To keep your tax reliefs, you must hold your EIS shares for at least three years. This period starts from the date of issue or when the company started trading, if later.
If you sell before this time, HMRC will claw back the income tax relief you received. The three-year clock starts ticking from different points depending on circumstances. Be prepared for the long-term nature of these investments. They're not suitable if you might need quick access to your money.
