The Enterprise Investment Scheme (“EIS”) is designed to encourage investment by individuals in ordinary shares of unquoted trading companies. The scheme allows companies which meet certain conditions (qualifying companies) to raise funds by issuing full risk ordinary shares to individual investors previously unconnected with the company.
The funds raised must be used for the purposes of a qualifying trade carried on in the UK, or for research and development expected to result in such a trade. Funds raised must be used within 2 years of the share issue.
An individual can invest up to a total of £1,000,000 in an EIS company in the current tax year. A further £1,000,000 can be invested in EIS if allocated to knowledge intensive companies.
The Possible Tax Benefits
Five possible tax reliefs are available through EIS:-
- Income tax relief
- Capital gains tax relief
- Loss relief
- Deferral relief
- Business relief
EIS relief is provisional in the sense that it may be withdrawn or reduced if a subsequent event takes place which contravenes the conditions governing the relief. In broad terms, both the company and the investor must satisfy the relevant EIS conditions for three years from the time the shares in the company are issued. In particular, the investor must not sell the shares or receive value from the company during that period.
Income Tax Relief
A qualifying individual will receive up front tax relief equal to 30% of their investment, subject to them having an income tax liability of at least the amount of income tax relief being claimed. It may be possible to carry back the income tax relief to the previous tax year.
Capital Gains Tax (“CGT”) Relief
To the extent that EIS tax relief is given and not withdrawn, any capital gain accruing to an individual investor on the first disposal of eligible shares, which takes place three or more years after the date of issue of such shares, is not chargeable to CGT.
Relief is available for EIS shares which are disposed of at any time at a loss (after taking into account EIS income tax relief which is retained). The loss may be set against taxable income of the same year or the previous year at the election of the investor. Alternatively, the loss may be offset against capital gains in the tax year of disposal. Any excess losses can be carried forward for relief against future capital gains.
Investments into EIS will qualify for 100% inheritance tax relief after two years under Business Relief Rules (provided the investments are held at time of death).
CGT Deferral Relief
Liability to CGT arising from the disposal of any asset may be deferred by investing the capital gain (or part of the capital gain) in eligible shares in a qualifying EIS company. This investment must take place within the period beginning one year before and ending three years after the disposal, giving rise to the CGT liability.
Unlike the other reliefs available under EIS, CGT deferral relief is not subject to the annual £1,000,000 investment limit.
Accordingly, whilst any gain on the eligible shares themselves will itself be exempt from CGT, this relief enables liability to CGT on chargeable gains realised on the disposal of other capital assets to be deferred where an amount equal to such chargeable gain is reinvested in subscription for eligible shares in an EIS company.