Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) is a government-backed initiative introduced in 1994 to help early stage and therefore higher risk companies to raise finance by offering a range of tax relief to investors who purchase new full-risk ordinary shares in those companies.

Since EIS was launched, more than 26,000 individual companies have received investment through the scheme and raised some £15.9 billion of funds. Annually, EIS investment in UK enterprise reaches up to £2bn and is a vital source of sustainable economic growth [1].

[1] EIS and SEIS Statistics April 2017, HMRC

Potential EIS Benefits

EIS is effectively a package of tax reliefs for private investors, which are designed to make investing into UK SMEs more attractive. If used correctly, EIS reliefs have the potential to both enhance investment returns whilst reducing capital risk for private investors. EIS relief can be summarised by the following 5 categories:

1. 30% Income Tax Relief

Up to £1 million per individual may benefit from 30% income tax relief. For each £100,000 of investment, the actual cost is £70,000. The whole of this allowance can be carried back to the previous tax year to offset against income tax (an investor can choose to offset against which of the two years they have paid the greatest amount of income tax).

Income Tax Relief is available from the point of investment (investors must first receive an EIS3 certificate which can take 1-6 months to receive) however shares must be held for a minimum of three years from the date they are issued to avoid a possible clawback of relief from HMRC. Investors have a maximum annual cap of £1m that they can invest into EIS qualifying companies in order to receive Income Tax Relief (this is doubled to £2m for ‘knowledge-intensive companies’).

2. No Capital Gains Tax

Provided the shares are held for a minimum of three years, there is no Capital Gains Tax (CGT) due on the investment returns on exit. Dividends are taxable so high growth investments which focus on capital growth are the most tax efficient.

3. Inheritance Tax Relief

Investments into EIS qualifying companies are generally exempt from Inheritance Tax (IHT) after two years from the investment date. This exemption allows EIS to investments fall outside the estate for IHT purposes, potentially allowing considerable assets to be preserved intact for dependants, saving 40% IHT.

Loss Relief

Loss relief applies in the event an EIS qualifying company fails or is exited at a price per share lower than what they were subscribed for, crystallising a loss on initial investment. Under Loss Relief, the loss can be offset against income tax minus the 30% Income Tax Relief already received.

Example: If we were to assume that there was a total failure of a company with no assets on winding up, whereby an additional rate taxpayer invests £100,000 into an EIS qualifying company, the £70,000 net loss could be offset against that year’s tax bill (or the previous tax year) allowing £31,500 to be claimed back. Therefore, assuming EIS rules are adhered to, the actual loss on a £100,000 investment into a company that generated a zero return on exit would be limited to £38,500.

1. Capital Gains Tax Deferral Relief

Capital Gains Tax Deferral Relief (CGT Relief) allows for tax on capital gains generated over the past three years to be rolled over into EIS qualifying companies and potentially be further reduced by other tax allowances over a period of time, such as timing disposals in order to utilise annual CGT allowances and inter-spousal transfers to maximise tax efficiency. Unlike Income Tax Relief, there is no maximum cap on the capital gains that can be re-invested into EIS qualifying companies.

If you are interested in investing in an EIS scheme please use the following link

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This guide has been designed to provide general information about Enterprise Investment Schemes (EISs) and is based on our understanding of the current legislation and HMRC practice. The information does not constitute as tax, legal or financial advice and should not be relied upon. Investment into non-readily realisable securities is not suitable for retail investors as defined in the FCA handbook COBS 3.4.1R as investment into unlisted equities is high risk and investors may lose some, all or part of their original capital invested. Independent financial, tax and legal advice should be sought from a suitably qualified advisor.
Please be advised the EIS benefits are dependent on individuals tax treatment and independent tax advice should be sought. EIS qualifying status can be amended or withdrawn dependent on individual investee company circumstances and/or legislative requirements.

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