What is the EIS?
The Enterprise Investment Scheme ("EIS") is a government scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies.
There are five current EIS tax reliefs available to investors in companies qualifying under the EIS, which are summarised below :
- Income tax relief
- An individual with no more than a 30% interest in the company can reduce their income tax liability by up to 30% of the amount invested.(This 30% rate applies to shares issued on or after 6 April 2011 since EU State Aid Approval has been given). An EIS qualifying investment must be held for no less than three years from the date of issue, or until three years from commencement of trade, if later.
- The minimum subscription is £500 per company and the maximum in respect of which a subscriber may obtain income tax relief in any year is £500,000. It is proposed this limit will increase to £1m per annum from 6 April 2012 - EU State Aid Approval has been obtained for this.
- Individuals may elect to treat their subscription for EIS shares, up to their maximum annual allowance, as if made in the previous tax year, thereby effectively carrying income tax relief back one year. In other words, up to £1m may be invested of which £500,000 could be applied to the previous tax year.
- Individuals each have an EIS allowance of £500,000, so a married couple could invest up to £1m per tax year.
- Income Tax Relief is limited to the amount which reduces the individual's income tax liability for the year to nil. Example
- CGT Freedom
- No Capital Gains Tax is payable on the disposal of shares after three years, or three years after commencement of trade, if later, provided the EIS initial income tax relief was given and not withdrawn on those shares. However, the shares can be held for much longer, thus potentially permitting CGT free gain to accrue over a longer period. The opportunity for a CGT free gain can be an extremely valuable benefit from subscribing for shares in a successful EIS qualifying company. Example
- Inheritance Tax Relief – ‘IHT’ Relief
- Shares in EIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax purposes at rates of up to 100% after two years of holding such investment, so that any liability for Inheritance Tax is reduced or eliminated in respect of such shares. For a simple example of the impact of IHT relief see example.
- Business Property Relief interacts with EIS and a more detailed summary is set out here link to pdf example
- CGT Deferral Relief
- Tax on capital gains realised on a different asset can be deferred for as long as the EIS qualifying shares are held or even indefinitely, where disposal of that asset was less than 36 months before the date of the issue of shares in the EIS investment or less than 12 months after it.
- Deferral relief is unlimited, in other words, this relief is not limited to investments of £500,000 per annum and can also be claimed by investors (individuals or trustees) whose interest in the company exceeds 30%. Example
- Loss Relief
- If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such loss can be set against the investor's capital gains, or his income in the year of disposal or the previous year.
- For losses offset against income, the net effect is to limit the investment exposure to 42p in the £1 for a 40% tax payer or to 35p in the £1 for a 50% tax payer, if the shares were to become totally worthless.
- Alternatively the losses can be offset against Capital Gains at the prevailing rate of 18% or 28% as applicable. Example
More detailed information about EIS for Investors and businesses seeking EIS investment can be found by clicking on one of the links below.