Although it’s been around for more than two decades, a persisting knowledge gap means many investors are unaware of how to access EIS tax relief.

The Enterprise Investment Scheme (EIS) was introduced in 1994 to help smaller, higher-risk, unquoted companies raise finance by offering a series of tax reliefs to investors who purchase new shares in these companies, thereby helping lessen the amount of investor capital at risk.

EIS is complemented by the Seed Enterprise Investment Scheme (SEIS), which mirrors EIS rules but addresses seed-stage companies.

EIS in action

Examples of potential EIS tax relief

* At a tax bracket of 45%, the loss relief would be £7,000 x 45% = £3,150. Therefore, for £10,000 invested, your real loss is £7,000 - £3,150 = £3,850. Source: Rise of the growth hunters, 2016.

You can get a wider picture of the tax reliefs possible through EIS here and SEIS here.

‘Our own data in the Barclays Entrepreneurs Index reveals that the EIS and seed EIS tax reliefs have been popular measures and contributed to a rise in good conditions for entrepreneurs,’ says Richard Heggie, Head of High Growth and Entrepreneurs at Barclays. ‘It’s crucial that UK businesses have access to a wide range of funding on their journey to growth.’

As you can see from the illustrations given above, the two schemes can offer significant tax reliefs for investors in early-stage businesses, helping manage the risk associated with backing startups and stimulating the UK investing sector. But despite these apparent positives, EIS and SEIS face a significant hurdle.

People simply don’t seem to know what they are.

‘Once again, the message that shines through most brightly from this report is that whilst EIS and SEIS continue to be a vital source of funding for SMEs, for investors, a knowledge gap persists whereby awareness of EIS and SEIS is significantly below that of more traditional investments, such as ISAs and pensions,’ says Mark Brownridge, CEO of the EIS Association.

Young people leading the way

Research conducted by FTI for Rise of the growth hunters showed that 18-to-30-year-olds are far more likely than older investors to use tax-efficient investment structures, such as EIS and SEIS, to make early-stage investments.

In fact, one-third of young people say tax-efficient structures make them ‘much more likely to invest’ in early-stage equities – a much higher reading than the other age groups (see barchart below).

‘A lack of information, access to opportunities and awareness of the EIS tax regime among older investors are just some of the issues investors face. We estimate that if these barriers are broken down, up to £25bn of investor demand could be released into early-stage equities in the next 12 months,’ says CEO Gonçalo de Vasconcelos.

How would you rate the impact of EIS/SEIS on encouraging early-stage equity investing?

EIS survey

Many of the private market deals that list on SyndicateRoom are EIS and/or SEIS eligible, while Fund Twenty8 is a passive EIS fund.

Further findings as well as the methodology used for obtaining these results may be found in Rise of the growth hunters, the complete PDF of which is available free to download here. We hope you find it both insightful and, in this uncertain economic climate, inspiring. And remember: we’d love to hear what you think.