The Enterprise Investment Scheme (EIS) aims to help smaller companies to obtain finance by offering incentives to potential investors. Companies that qualify for EIS are significantly more attractive to investors than those that don’t
Investors can receive a tax rebate against their personal income tax equal to 30% of the amount of their investment as well as being able to sell their shares and pocket any capital gain tax free
How does EIS work?
If you subscribe for shares in a non-listed (or AIM listed) company performing a qualifying business activity you will (subject to both the company and you complying with certain requirements) be entitled to various tax reliefs. Particular requirements of note are that you must not sell your shares for a period of three years from the date of investment and must not enter into a transaction or arrangement by which your risk is reduced
You must not be connected with the company meaning that you can’t be a director, officer, employee or other paid consultant of the company and can’t hold either yourself or through associates 30% or more of the issued share capital of the company. In addition, your shares must not give you any preferential entitlement to receipt of a dividend or to capital (including on a winding up)
The definition of qualifying business activity includes any business other than property (including development, hotels and nursing homes), financial services (including dealing in commodities, shares and financial instruments, insurance, banking, legal and accountancy), receiving royalties or licence fees, leasing, shipping, agriculture, coal and steel production and shipbuilding
The available tax reliefs are as follows:
Income Tax Relief: available to investors who are individuals and amounting to 30% of the cost of the shares which is set against your income tax liability for the tax year in which the investment was made (up to a maximum tax reduction of £150,000)
Loss Relief: if you sell the shares at a loss, you can elect for the amount of the loss (less any income tax relief already received) to be set against your income of the year in which the shares were sold, or any income of the previous year, instead of the loss being set off against any capital gains.
Capital Gains Tax Deferral Relief: the payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company within the period of one year before or three years after the gain arose
Inheritance Tax: once an EIS investment has been held for at least two years it will generally fall outside your estate for inheritance tax purposes
Different types of EIS
EIS can broadly be split into four areas:
Single Company EIS: A single company EIS is often the highest risk as it invests in one individual company. An investor’s fortunes will depend upon the performance of that one underlying company. Usually unlisted, there will often be no exit route until the company is either floated or sold
EIS portfolio: An EIS portfolio is generally a managed service that invests in a number of underlying single EIS investments - often up to 20 different companies. It will be professionally managed, normally on a discretionary basis, and EIS relief is available as each individual investment is made and not when the portfolio service is first invested in
Approved EIS fund: An approved fund will generally have four or more different underlying companies. EIS clearance is effectively received from HMRC prior to the fund launch. This has no bearing on the underlying investments, however it means the income tax relief is given in the year the investment is made by the investor. CGT deferral is not available until the manager has made the underlying investments. An Approved Fund has a requirement to invest 90% of funds raised within 12 months of launch
Unapproved EIS fund: Similar to the approved fund, the unapproved fund will generally have four or five different underlying companies. Income tax relief is given each time an underlying investment is made. Capital gains can also be deferred each time an investment is made
While the tax breaks of an EIS are attractive, you should always seek advice from a professional advisor before investing in EIS. Investment into companies who qualify for EIS can be highly risky, and you may lose all of your capital which you invest
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