Created in 1994, The Enterprise Investment Scheme (EIS) is a group of tax reliefs that succeeded the Business Expansion Scheme. It was created as an incentive to have investments in small unquoted companies carrying on a qualifying trade in the UK.
The scheme is extremely popular, with £14.2 billion invested into over 25,000 companies by the end of the 2014-2015 tax year. Just in that year alone, over £1.8 billion was invested under the Enterprise Investment Scheme.
Investing in companies that aren’t listed on the stock exchange can be high risk for loss of capital and low market liquidity, meaning that it can be hard to sell or release the investment, particularly time-wise. Therefore, the tax reliefs on offer from EIS are designed to offer investors an incentive.
Provision of Tax Relief
There are several different kinds of tax relief available to both direct investors, and also to investors through a managed EIS fund/portfolio service. These are dependent on the company receiving investment qualifying as a company under the scheme.
Some of the tax benefits are:
30% upfront Income Tax relief. This can be carried back to the previous tax year. The maximum subscription per investor per year is £1,000,000, which yields a possible reduction in tax liability of £300,000 per annum.
Capital Gains Tax (CGT) deferral is where an investor can defer capital gains realised on a different asset, as long as the disposal of the asset was less than 12 months before the EIS investment, or happened up to 36 months after it. It can be claimed by investors if their interest in the company is larger than 30% and is limited to the amount being invested into the EIS. Taper relief is available when gains arise on the EIS investment.
If the EIS initial income tax relief was given and not withdrawn on shares, there is no CGT to pay on any gains made when the investment is realised after three years (or five years if the investment was made before 6th April 2000).
Tax relief from investment losses. If EIS shares are disposed of at any time at a loss, this loss can be set against the investor’s capital gains or income in the year of disposal. This can possibly limit an investor’s capital total loss to 38.5%.
Shares are not part of the estate for Inheritance Tax purposes, as long as investments have been held for at least 2 years at the time of death and the company qualifies for Business Property Relief (BPR).
Some of the qualifications that must be met include:
The company must not have assets greater than £15 million
The company may have no more than 250 full-time equivalent employees
All capital employed must be actively engaged in the company within 24 months
The company must not be in specific industries
Entry into the scheme is subject to a decision and audit made by an appointed tax officer
The company must not be listed or have any intention of becoming listed at the time of the investment
The investor may not have more than a 30% interest in the company
No partner or associate of the investor (including spouse, relations, prior business contacts) may have other interests in the company
The investor must not have any form of preferential shares
The investor must not have any other form of controlling interest in the company
The scheme must not be used for the purposes of avoiding tax
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