Pension savers concerned about inheritance tax (IHT) are on the look out for new ways to plan for retirement. The Enterprise Investment Scheme (EIS) is one attractive option, and EIS-focused investment managers are launching new products and services as demand increases.
The EIS, which has been running for more than 30 years, has often been regarded as a niche investment suitable only for the most sophisticated and wealthy investors. That is understandable – the scheme aims to help small and very early-stage businesses raise cash to fund growth, but such enterprises often fail, putting investors’ money at risk.
However, while the EIS was originally conceived as a scheme through which investors would put money into individual firms, several specialist managers now offer funds through which you can spread your money across a portfolio of qualifying businesses, helping to reduce the jeopardy. And the generous tax reliefs on offer provide a substantial cushion when individual investments do disappoint.
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Change in the Enterprise Investment Scheme small print
One of those reliefs is particularly eye-catching in today’s environment. Under the current rules, investments in EIS-qualifying companies don’t count towards the value of your estate for IHT purposes once you’ve held them for two years or more. In April 2026, the small print will change slightly, limiting full IHT relief to the first £1 million of qualifying EIS assets, but only 50% of the value of your remaining EIS assets will be subject to IHT, reducing the tax rate on these assets from 40% to 20%.
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For anyone worried about the changing rules on pension assets, this makes the EIS look interesting. Remember, from April 2027, any money remaining in your private pension plans at the time of your death will, for the first time, fall within the IHT net. For some families, that could lead to a sizeable tax bill – and boosts the attraction of alternative vehicles that are more IHT-efficient.
An EIS comes with other tax perks, too. You get up to 30% up-front tax relief on your investment – a little less than the 40% or 45% available to higher- and additional-rate taxpayers on pension contributions, but the annual investment limit on the EIS is very generous, at £1 million. There’s also no capital-gains tax (CGT) to pay on any profits you make, and you can offset losses against your income tax bill.
All in all, the EIS packs a powerful punch from a tax-efficiency perspective, especially in the context of the changing rules on private pensions. There’s potentially more tax relief available when you first save – at least in cash terms – and less liability to IHT at the other end. All of which comes with a hugely important caveat. The underlying assets in an EIS are much riskier than the investments that most savers hold in their pension funds. Investing through a professionally-run fund can help mitigate some of this risk – particularly compared with picking single qualifying companies yourself – but you’re still exposed to a volatile and illiquid set of assets.
The EIS is therefore best-suited to savers who have already amassed substantial pots of cash in conventional vehicles, including private pensions and individual savings accounts (ISAs). These are also likely to be the savers most at risk of leaving their heirs with an IHT liability.
It’s also sensible to take independent advice on EIS investments. Professionals expect demand for the EIS to rise fast in the months and years ahead. Roughly 20 firms are currently raising money for EIS ventures, with platforms such as Wealth Club offering access to the scheme.
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