Should you have an Enterprise Investment Scheme? What is it?

The Enterprise Investment Scheme offers tax advantages and the possibility of financial gain

Terry Tanaka says that taking a chance on the plan could lower your family's IHT bill.

Those who save for pensions and are worried about inheritance tax (IHT) are searching for innovative retirement planning strategies. The Enterprise Investment Scheme (EIS) is a compelling choice, and as demand rises, investment managers specializing in EIS are introducing new goods and services.

Since it began operating more than 30 years ago, the EIS has frequently been seen as a specialized investment that should only be made by the wealthiest and most experienced investors. That makes sense because the program seeks to assist small and very early-stage businesses in raising capital to finance expansion; however, these businesses frequently fail, endangering the money of investors.

But, although the EIS was initially designed as a way for investors to invest in specific companies, a number of specialized managers now provide funds that allow you to distribute your capital among a number of eligible companies, which lessens the risk. Additionally, when individual investments do not perform as expected, the substantial cushion provided by the generous tax reliefs on offer is substantial.

The Enterprise Investment Scheme's fine print has changed.

In the current setting, one of those reliefs is especially striking. Investments in EIS-qualifying businesses do not, under the current regulations, count toward the value of your estate for IHT purposes after you have owned them for two years or longer. The fine print will slightly change in April 2026, lowering the tax rate on remaining EIS assets from 40% to 20% and restricting full IHT relief to the first £1 million of qualifying EIS assets. Only 50% of the value of your remaining EIS assets will be subject to IHT.

This gives the EIS a fascinating appearance for anyone concerned about the evolving regulations regarding pension assets. Recall that starting in April 2027, any funds that are still in your private pension plans at the time of your passing will be subject to the IHT net for the first time. For some families, that could result in a sizable tax bill, which increases the appeal of more IHT-efficient alternative vehicles.

Additionally, an EIS has additional tax benefits. The EIS offers a generous annual investment limit of £1 million, but you only receive up to 30% upfront tax relief on your investment, which is slightly less than the 40% or 45% available to higher- and additional-rate taxpayers on pension contributions. Losses can be deducted from your income tax bill, and there is no capital gains tax (CGT) due on any profits you make.

From the standpoint of tax efficiency, the EIS is a potent tool overall, particularly when considering the evolving regulations surrounding private pensions. Your initial savings may result in greater tax relief, at least in cash terms, and a lower final IHT liability. There is a very significant disclaimer attached to all of this. The investments that the majority of savers keep in their pension funds are far less risky than the underlying assets in an EIS. Investing through a professionally managed fund can help reduce this risk, especially when compared to choosing individual qualifying companies on your own, which exposes you to an unstable and illiquid collection of assets.

Thus, savers who have already accumulated sizeable sums of money in traditional vehicles, such as individual savings accounts (ISAs) and private pensions, are the ideal candidates for the EIS. Additionally, they are probably the savers most likely to leave their heirs liable for IHT.

Getting independent advice about EIS investments is also a good idea. Experts predict that in the upcoming months and years, demand for the EIS will increase quickly. With platforms like Wealth Club providing access to the scheme, about 20 companies are currently raising capital for EIS ventures.