What is the EIS?
SEIS/EIS uses tax reliefs to incentivise private investors who recognise that significant returns are achievable if they are willing to risk their funds by investing in early stage businesses. Early stage businesses often struggle to raise equity finance so EIS/SEIS has established itself as a trusted and crucial source of equity funding. The schemes therefore play an important role in facilitating the smooth flow of risk equity capital from private individuals to early stage businesses.
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The Enterprise Investment Scheme (“EIS”) is a Government scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies.There are five current EIS tax reliefs available to investors in companies qualifying under the EIS, which are summarised below :
- Income tax relief
- An individual with no more than a 30% interest in the company can reduce their income tax liability by up to 30% of the amount invested. An EIS qualifying investment must be held for no less than three years from the date of issue, or until three years from commencement of trade, if later.
- There is no minimum subscription per company and the maximum in respect of which a subscriber may obtain income tax relief in any year is £1m.
- Individuals may elect to treat their subscription for EIS shares, up to their maximum annual allowance, as if made in the previous tax year, thereby effectively carrying income tax relief back one year. In other words, up to £2m may be invested of which £1m could be applied to the previous tax year.
- Individuals each have an EIS allowance of £1m, so a married couple could invest up to £2m per tax year.
- Income Tax Relief is limited to the amount which reduces the individual’s income tax liability for the year to nil. Example
- CGT Freedom
- No Capital Gains Tax is payable on the disposal of shares after three years, or three years after commencement of trade, if later, provided the EIS initial income tax relief was given and not withdrawn on those shares. However, the shares can be held for much longer, thus potentially permitting CGT free gain to accrue over a longer period. The opportunity for a CGT free gain can be an extremely valuable benefit from subscribing for shares in a successful EIS qualifying company. Example
- Inheritance Tax Relief – ‘IHT’ Relief
- Shares in EIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax purposes at rates of up to 100% after two years of holding such investment, so that any liability for Inheritance Tax is reduced or eliminated in respect of such shares. For a simple example of the impact of IHT relief. Example
- CGT Deferral Relief
- Tax on capital gains realised on a different asset can be deferred for as long as the EIS qualifying shares are held or even indefinitely, where disposal of that asset was less than 36 months before the date of the issue of shares in the EIS investment or less than 12 months after it.
- Deferral relief is unlimited, in other words, this relief is not limited to investments of £1m per annum and can also be claimed by investors (individuals or trustees) whose interest in the company exceeds 30%. Example
- Loss Relief
- If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such loss can be set against the investor’s capital gains, or his income in the year of disposal or the previous year.
- For losses offset against income, the net effect is to limit the investment exposure to 38.5p in the £1 for a 45% tax payer, if the shares were to become totally worthless.
- Alternatively the losses can be offset against Capital Gains at the prevailing rate 28% as applicable. Example
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Procedure for claiming EIS Tax Relief
To claim relief the investor must have an EIS3 Form from the company invested in. The investor then has to fill in and submit a self-assessment income tax return for the appropriate tax year to HMRC showing the EIS investment. The EIS3 form needs to be submitted with the return if the investor is also claiming CGT deferral relief. The claim may lead to a rebate of tax. If the investor is making the claim for the current tax year, then before they submit the return they can write to ask HMRC to adjust their PAYE code (or their payments on account if they are self employed). It is advisable to speak to an accountant or other professional with regard to the tax year for which relief should be claimed. There is also information on the HMRC website under EIS Investing.