Enterprise Investment Scheme – Tax Factsheet
What is EIS?
The enterprise investment scheme (EIS) was established in the 90’s to encourage investment by private investors in small, unquoted trading companies. The scheme is largely focused on assisting small companies to raise finance at the outset by offering a range of tax reliefs to those investors who buy new shares in a qualifying company.
In addition to EIS, the seed enterprise investment scheme (SEIS) was introduced in 2012 to further encourage the investment in small, newly formed business ventures. SEIS works in a very similar way to EIS but has more advantageous tax reliefs and naturally more restrictive conditions that must be met in order for a company to qualify.
EIS & Tax Reliefs
EIS investments can offer an investor income tax relief on the investment made and a CGT exemption on any gains made when the shares are disposed of. It can also be used as a method of CGT deferral for the disposal of an asset.
Income Tax Relief
- An investor can be given income tax relief at a rate of 30%on their investment in EIS. This is up to a maximum value of £1m a year.
- Any income tax relief is clawed back if the shares are disposed of within three years.
- To qualify for the relief, the company’s trade must consist substantially of a qualifying business activity, there are also certain company requirement to be met. In addition, the investor cannot be a connected person of the company.
- It is important that an investor has received income tax relief on the cost of EIS shares and the shares are subsequently disposed of after the three year holding period, in order for any gains realised to be exempt for CGT purposes.
- The exemption may be restricted if the investor oversubscribed for EIS shares but there are no restrictions if the investor was unable to claim full income tax relief at the outset due to a lack of tax liability.
- Any losses incurred on the disposal of EIS shares are allowable for CGT purposes although capital losses will be restricted by the amount of income tax relief previously claimed.
- Share loss relief may also be able to be claimed whereby a capital loss arising on the disposal of EIS shares is set against income.
- Where an asset is disposed of, deferral relief can be claimed against the amount of the chargeable gain arising when an amount equal to the gain is invested in EIS shares.
- Partial deferral relief can be claimed where the investor wishes to invest an amount attributable to only part of the gain.
- There are certain conditions that need to be considered to ensure qualification such as investor residency and time limits for making the claim.
- There is no upper limit on the amount of deferral relief available to an individual although there are rules around how much an individual can invest in one company or group.
- Additionally, the connected persons issue does not apply when considering CGT deferral and unlike income tax relief and CGT disposal relief, CGT deferral relief is also available to Trustees.
- The gain deferred through the relief will become chargeable as and when there is a chargeable event i.e. the shares are disposed of, the company ceases to be a qualifying company or the investor becomes non-resident within the 3-year period.
This factsheet provide a brief overview of the EIS tax reliefs available. If you are interest in using EIS please contact one of our team for more detailed advice, specific to you.