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 separate EIS tax reliefs:

Income tax relief - Provided an EIS qualifying investment is held for no less than three years from the date of issue, or until three years from commencement of trade, if later, an individual with no more than a 30% interest in the company can reduce their income tax liability by an amount equal to 20% of the amount invested. 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. 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 carrying income tax relief back one year. Working example
CGT Deferral Relief - Tax on gains realised on a different asset can be deferred indefinitely, where disposal of that asset was less than 36 months before 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%. This can be done on a sequential or serial basis. Working example
CGT Freedom - No Capital Gains Tax payable on 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or three years after commencement of trade, if later, provided the EIS initial income tax relief was given and not withdrawn on those shares. Working 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 gains offset against income tax, the net effect is to limit the investment exposure to 48p in the £1 for a 40% tax payer or to 40p in the £1 for a 50% tax payer, if the shares become totally worthless. Alternatively the losses can be offset against Capital Gains Tax at the prevailing rate - 18% from tax year 2008/09. Working example
Inheritance Tax Exemption - EIS Investments are generally exempt from Inheritance Tax after two years of holding such investment. Working example

EIS is appropriate for those investors who wish to include in their portfolio some high risk companies.

The rules governing the EIS are complex and interrelated with other legislation so it is nearly always essential to consult a professional who is experienced in this area. It is a very specialised area and you should check the credentials of the firm to make sure that it is sufficiently expert in the subject of EIS to be able to provide worthwhile advice. Many firms do not have this expertise and accordingly they may put you off investing, or seeking investment, via the EIS route. If in any doubt, please do consult a professionally qualified adviser.

HMRC publish relevant information on their website at http://www.hmrc.gov.uk/eis. A PDF of HMRC's guidance of the EIS can be found here http://www.hmrc.gov.uk/eis/print.htm

Investors are recommended to check the details of the Advance Assurance granted by HMRC since this is done on the basis of 'information provided'. EISA recommends that this be done by suitably qualified advisers familiar with EIS legislation. If inadequate or insufficient information is disclosed this may prejudice the tax breaks relating to investments, either on investment or subsequently. The quality of the clearance should therefore be scrutinised carefully. The application form AA1 for Advance Assurance can be downloaded here.

You should be able to select the appropriate type of adviser from the membership list but if you have any queries, please email members@eisa.org.uk

Whilst EISA endeavours to ensure that its professional members are suitably qualified to advise on the EIS, the Association neither endorses any particular member, product or company/firm wishing to raise money under the EIS nor does it accept any liability for advice given.