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.
Benefits of the EIS scheme:
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).
Loss Relief
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.
Carry Back
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.
Restrictions For Investors:
Regardless of the number of companies you invest in, you cannot get a tax deduction bigger than £ 300,000 (£ 1,000,000 investment) for each tax year.
You can not be associated with the company that you invest in as an employee, manager, founder etc.
The shares you obtain through investment must be in your possession for at least 3 years.
You must be a UK taxpayer.
You cannot carry-forward the tax relief.
You cannot acquire shares that are already listed on the market, but only newly-emitted ones.
HERE ARE A COUPLE OF EXAMPLES OF HOW THE TAX RELIEFS APPLY IN A REAL ENVIRONMENT
First of all, let us talk about the benefits that apply to your previously obtained funds, once you decide to invest them in a EIS-eligible company. If the money were obtained through the sale of an asset, you do not have to pay the Capital Gains Tax as long as you have the EIS shares. If you invest the money obtained from a previously successful non-SEIS investment, you only have to pay 30% of the Capital Gains Tax for the value you decide to invest.
Now, let us say you decide to invest the maximum amount of £1,000,000 in a business or startup. The company we are talking about is offering a new solution and attracts multiple investors, you ending up owning 20% of the company in shares.
At the end of the fiscal year, £300,000 of your income tax will be deducted. Therefore, the startup or small business you invested in will benefit from a capital influx of £1,000,000 and your liquid assets will only decrease with half of that. If you want, you can apply this deduction to a previous tax year.
If the investment proves to be successful and profitable and the shares you acquired for £1,000,000 are sold for £3,000,000 after a minimum of three years, there is no Capital Gains Tax to be paid for the gained capital.
If the shares are held for two years, they will be exempt from the inheritance tax.
If the investment does not prove to be successful and the business fails to bring any revenue, the £1,000,000 you invested is not lost in its entirety. First of all, you get £300,000 back as income tax deduction. Second of all, you can also ask for a loss relief, accounting for the percentage that represents your income tax from the remaining amount. So, if your income tax is 50%, you will get another deduction of £350,000. Therefore, at the end of the day, a bad investment of £1,000,000 will only cost you £650,000.
This is a big risk reduction procedure meant to encourage investors to invest in innovative ideas and businesses which require a bigger investment than the ones who fall under the SEIS requirements. This is highly beneficial for the business environment, as businesses which need high amounts of capital are having trouble in finding investors willing to risk such amounts of money.
How To Claim EIS Tax Relief
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.
PLEASE NOTE
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.
