The Enterprise Investment Scheme (EIS) is designed to entice investors into putting money into small UK companies. Find out what the rules are, how the tax reliefs work and more.
What is the Enterprise Investment Scheme (EIS)?
The Enterprise Investment Scheme (EIS) is designed to help small UK companies raise money to grow.
It works by offering generous tax reliefs to individual investors when they buy shares in a qualifying company and when they sell them after a minimum period.
Since its inception in 1993/94, the latest figures show over 24,500 companies been supported through the EIS and over £14 billion worth of funds have been invested.
This guide explains what the rules are for investors and the tax reliefs to take advantage of.
How it works
Individual investors can put as much as they like into any EIS-qualifying company but there is an overall maximum investment of up to £1 million per year that is eligible for tax relief.
Investment can either be made directly or through an investment fund, although this will attract charges and have a minimum investment amount.
Individual investors must not have more than a 30% interest in the company, must not get preferential shares and must not have any other form of connection or controlling interest in the company.
UK companies that aren’t listed on a stock exchange, are considered ‘small’ (i.e. have assets of £15 million or less before shares are issued) and have no more than 250 full-time employees are usually eligible to seek investment through the scheme.
If you’re a company thinking about raising money using the EIS take a look at the Government website for more details on how to apply.
Companies that have assets of up to £200,000 and fewer than 25 employees may qualify for a sister scheme called the Seed Enterprise Investment Scheme (SEIS) which launched in April 2012.
EIS tax reliefs
To offset the high-risk of investing in a small firm, the Government provides generous tax breaks to investors on Income Tax and Capital Gains Tax. Here’s what you should know about and how they work.
Income Tax relief
Investors that buy shares in a qualifying EIS company will get 30% tax relief on the cost up to £1 million, which is offset against the individual’s Income Tax bill for the year in which the investment was made.
That means individual investors can potentially reduce their tax bill by £300,000 per year.
The shares must be held for three years from the date of issue though or the tax relief will be clawed back.
The scheme also allows investors to ‘carry back’ all or part of the investment in one tax year to the preceding tax year so long as the limit for EIS relief is not exceeded in that year.
So, a subscription of £2 million worth of EIS shares might be made in 2016/17 but an investor can ‘carry back’ £1 million to 2015/16.
Again, the shares must be held for at least three years. If you break this condition, the relief will be clawed back.
Capital Gains Tax exemption
Investors making a qualifying EIS investment can also benefit from Capital Gains Tax (CGT) exemption.
There is no CGT charged on any gain made through EIS shares as long as they are disposed of after the minimum three-year holding period on which Income Tax relief was given.
Capital Gains Tax deferral relief
Paying CGT can be deferred when a gain is invested in shares of an EIS-qualifying company (even if the investor is connected).
The gain can be from the disposal of any kind of asset but the investment must be made one year before or three years after the gain occurred.
One of the other appealing perks of investing in an EIS-qualifying company is that you get relief on losses.
This means if EIS shares are disposed of for a loss at any time, the loss can be offset (after Income Tax relief already given) against income for that year and the previous year.
How to claim tax relief for EIS investments
You will need to make a claim for tax relief using the Self-Assessment tax return additional information form for the tax year in which the shares were issued.
You can make a claim for EIS Income Tax relief once you have the EIS3 ‘Enterprise Investment Scheme Certificate and claim to relief’ form. This form is used by the company invested in to certify that the criteria of the scheme are met.
If your investment was made through an investment fund, the company will issue the EIS3 form to the fund manager instead and you will get an EIS5 form or the ‘certificate and claim to relief for investment through an approved fund’.
You will need to have the details of your investments including:
- the name of the company invested in;
- the amount on which you are claiming relief for this year;
- the date of issue of the shares;
- the name of the HM Revenue and Customs office authorising the issue of the certificate, and their reference (as shown on the certificate);
- if you have subscribed more than £1 million for shares on which relief could be claimed, how you want the relief attributed to them.
You cannot make a claim for the investment you made in shares unless you have received either the EIS3 or EIS5 forms.
Claims can be made up to five years after the investment was made.
For more on how to claim tax relief check the Government’s helpsheet.
Should you invest?
EIS investments are high-risk, so certainly aren't for everyone.
They also lack liquidity. The money you put in buys shares in the company and you need to hold them for a minimum of three years before you can dispose of them.
However, the generous tax perks could offset some of these problems, especially if you are a higher rate taxpayer.
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