The Enterprise Investment Scheme (EIS) provides incentives for investors to invest in smaller companies raising funding. The scheme provides incentives such as income tax relief, capital gains tax exemption and further tax relief in the event of a loss.
Under EIS, an investor is allowed to invest up to £1million per year, and is eligible to receive an income tax relief of up to 30%. This tax relief is applied to each individual, so, for example, a married couple could invest a total of £2 million and receive a total income tax break of £600,000. Furthermore, EIS allows investors to deem their investment to have been made in the previous tax year, provided the investment limit for that year is not exceeded.
Income Tax Relief
If the value of your investments in a tax year is £1,000,000 or more, you can get a income tax deduction of up to £300,000. If the value of your investments is less than that, you’ll get an income tax deduction worth 30% of the investments value.
Capital Gains Tax Relief
Disposal Relief: If you hold the assets you acquired through investments for at least three years and sell them for greater value than the one you paid for initially, you’ll be exempt from the Capital Gains Tax.
Deferral Relief: If you sell any asset in your possession in order to acquire shares in a company which qualifies for the EIS scheme, you are not required to pay the Capital Gains Tax until a later date (usually when you get rid of the EIS shares).
This kind of relief is applicable if the investment you made does not prove profitable or the business fails. This relief also applies to the income tax. After deducting 30% of the value of your investment from it, you are normally left with the remaining amount of your investment lost. However, through EIS Loss relief, you can ask for another tax deduction accounting for the percentage that represents your income tax from the lost amount.
Capital Gains Tax Reinvestment Relief
If you made a previous investment of any kind which brought you financial gains and decide to reinvest them in a company which qualifies for the EIS scheme, you will be exempt from 30% of the Capital Gains Tax.
If you invest in a EIS-eligible company and you respect the requirements and rules explained above, you can apply the earned tax deduction to the income tax of a previous year. However, you must not have acquired more than £ 1,000,000 worth of EIS-eligible shares in the fiscal year you want to carry-back your deduction for.
Inheritance Tax Relief
If you hold the shares of a EIS-eligible company you invested in for more than 2 years, those shares will be inheritance tax exempt.
The company must first apply to HMRC to be EIS eligible by completing an EIS1 form. The investor cannot claim relief until the company sends them an EIS3 form. The investor can claim through the Self-Assessment tax return for the tax year, in which the shares were issued.
Claims can be made up to five years after the investment, after the first 31 January following the tax year in which investment was made.
The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment. Please visit the HMRC website for further information on tax relief.