EIS in the Healthcare and Life Sciences Sectors

Disclaimer: This article provides a general picture of the conditions for and benefits of EIS. It should not be relied upon by anyone seeking to set up EIS investment. Bespoke, tailored tax advice should be sought before taking any action in investing in EIS shares or setting up EIS in respect of a company.

The Enterprise Investment Scheme (EIS) was introduced to promote investment by individuals in the equity of smaller, higher risk companies. It is particularly relevant to small, explorative companies requiring early-stage capital injections, which is why it is a key aspect of encouraging investment in the healthcare sector.

EIS focuses on intellectual pursuits through relaxing certain eligibility conditions for knowledge-intensive companies, which tailors the scheme to the research-heavy nature of explorative start-ups within the healthcare sector. As outlined in the eligibility conditions for companies below, requirements such as there being a risk to capital, gross assets not exceeding £15 million and the number of employees not exceeding 250 tailor this relief to early-stage investment.

The EIS is not the only tax-incentivised investment scheme but it is the most common seen in practice. Others include the Seed Enterprise Investment Scheme (SEIS) (which is similar to EIS but which is aimed at smaller, start-up companies and provides enhanced tax relief for such enterprises) and Social Investment Tax Relief (which is focused on encouraging investment in social enterprises).

In this article we focus on EIS Relief, its eligibility conditions, its benefits and its relevance to the healthcare and life sciences sectors

Terms of reference

• EIS Shares – Shares in respect of which investors can claim EIS Relief

• EIS Company – A company, the shares in which EIS Investors can claim EIS Relief (an EIS-eligible company)

• EIS Investor – An investor entitled to claim EIS Relief in respect of EIS Shares

EIS Relief

EIS Investors can receive Income Tax and Capital Gains Tax (CGT) relief which may be described as unrivalled.

For EIS Shares issued on or after 6 April 2018, the annual investment limit to which the EIS Reliefs set-out below apply is £2 million (provided that anything above £1 million is reinvested in knowledge-intensive companies). This is the limit to which the income tax relief enjoyed by EIS Investors is subject (discussed further below).

As referred to already above, EIS Relief has a particular focus on knowledge-intensive companies. This is why it is so prevalent in the healthcare sector.

A knowledge-intensive company for these purposes is one that meets:

• the operating costs condition; and either

• the innovation condition; or

• the skilled employee condition.

The operating costs condition requires that a significant proportion of the company’s operating costs consisted of R&D expenditure – specifically, at least 15% of operating costs in one of the previous 3 years or at least 10% in each of the previous three years. Where a company is under 3 years old, it can elect to be judged on the 3 following, rather than preceding, years.

The innovation condition requires the Company to be creating or have created intellectual property that it is reasonable to assume will form the majority of the Company’s business.

The skilled employee condition is that at least 20% of the workforce has a higher education qualification and is engaged directly in the Company’s R&D.

Income Tax

Up to the annual investment limit, the income tax liability of the EIS Investor is reduced by 30%, provided the EIS Shares are held for the requisite 3 years. Generally, this applies to the year in which the EIS Shares are issued but there are elections by which the relief may be claimed in respect of other years. If, within the period starting 1 year before and 3 years aft the shares the EIS Investor receives any value from the EIS Company

Capital Gains Tax

Provided the EIS Shares qualify for Income Tax relief and they have been held for the required 3 years, there will be an exemption from CGT on disposal of the EIS Shares. In addition, provision is made for an EIS Investor to defer a gain arising on the disposal of any other asset where the proceeds of that sale are capable of being treated as being re-invested in EIS Shares either 1 year prior to, or 3 years after, the relevant disposal.

There are certain specific conditions which need to be met in order for CGT relief to apply, including the need for the EIS Investor to not have received value from the EIS Company within the restricted period (typically 1 year prior to the EIS Shares being issued and 3 years after the date the EIS Shares are issued).

Example

[This example is based on a hypothetical scenario which makes certain assumptions as to the availability of reliefs and does not take into account the personal tax circumstances of the individual investor, in particular, their eligibility and the requirements of business asset disposal relief on a chargeable gain. Bespoke advice should be sought if ever considering investing in EIS Shares.]

Assume the necessary conditions for Income Tax and CGT relief are met and take the hypothetical example of a taxpayer who disposes of an asset for £1 million (Original Asset), giving rise to a chargeable gain of £500,000 in the 2025-26 tax year.

That taxpayer could reinvest the £500,000 gain into EIS Shares in the 2025-26 tax year, thereby deferring the gain on the sale of the Original Asset.

EIS Income Tax relief could then cause the taxpayer’s income tax liability to be reduced by £150,000 in that tax year.

Finally, when the taxpayer comes to sell the EIS Shares, the disposal of those EIS Shares could be exempt from CGT itself, albeit the chargeable gain on the disposal of the Original Asset would then come into charge.

The above, of course, is all subject to that taxpayer’s personal tax position but helps to demonstrate the potential benefits investment in EIS Shares can bring.

Conditions for EIS Relief (Investors)

There are certain conditions that investors investing in shares in an EIS Company must meet in order to benefit from EIS Relief.

Specific conditions are set out in respect of each of the Income Tax and CGT reliefs, however they can broadly be summarised in that the investor must:

• be an individual (as opposed to a company or partnership)

• be investing for genuine commercial reasons

• not be connected with the EIS Company, meaning:

  • they are not an employee or a paid director of the EIS Company or any partner or subsidiary of the EIS Company; and

  • they do not hold personally or together with their associates, a material stake in, or otherwise control, the EIS Company or any of its subsidiaries (material stake being one that exceeds 30% of the ordinary share capital, issued share capital or voting rights or which entitles the individual o more tan 30% of the assets of the company or subsidiary on dissolution);

If the investor already holds shares in the company, those shares must either be EIS Shares (or other risk-based shares) or founder shares.

Conditions for EIS Relief (Companies)

There is a detailed list of requirements for a company to meet in order for its shares to benefit from EIS Relief. The requirements, broadly, can be broken down into the following categories:

Helpfully, companies can apply for clearance from HMRC that they would qualify for EIS Relief.

EIS in Healthcare

EIS Relief and the somewhat more relaxed conditions relating to knowledge-intensive companies is intended to lend itself to the IP-focused and uncharted business pursuits of companies, the likes of which are often seen in the healthcare sector. This is perhaps why some of the top EIS funds have a focus on the healthcare sector.

The long developmental cycles of new healthcare projects also brings the relevance of incentivising capital injections to the fore.