An enterprise investment scheme is a government initiative that can provide a source of funding to early-stage companies while offering tax benefits to its investors. The government offers EIS tax reliefs to encourage people to invest in early-stage businesses with high growth potential. These investments can help to create successful businesses which create jobs and help economic growth in the UK.
The scheme offers income tax relief at 30% on the amount invested. Although there is no minimum amount you have to invest, the maximum an individual can invest in one tax year is £1,000,000 which would result in a tax deduction of £300,000. However, this relief can only reduce your tax liability and is therefore, dependent upon having the sufficient tax liability to cover it.
The shares must be held for at least 3 full years from the date of issue or the tax relief will be withdrawn.
An additional £1,000,000 is eligible for the same tax relief of 30% if it is invested in “knowledge-intensive” companies; HM Revenue & Customs have a strict definition of knowledge- intensive companies and there are various conditions which must be met.
Any gain from the sale of EIS shares, are tax free as long as the shares are held for at least 3 years, income tax relief is received in full on the whole of the investment, and no relief has been withdrawn. Shares can be kept for a long period of time which potentially allows the investor to accrue a CGT exemption over many years which can be very tax efficient.
If shares are sold at a loss, you can offset the loss against capital gains in the year or you can elect for the loss to be offset against income tax in the year of disposal or the previous year, which allows much more flexibility to use the loss.
You can also benefit from deferral relief when you invest in EIS. When you dispose of an asset and make a capital gain you usually have capital gains tax to pay in the year you dispose of it. Deferral relief enables you to treat the gain as not arising until a future date if you purchase EIS shares. CGT may be charged on the deferred gain in a later tax year, usually in the year you dispose of the EIS shares. If you claim income tax relief on the purchase of EIS shares then you can claim deferral relief as well, however you do not have to claim income tax relief to claim deferral relief.
You can claim deferral relief on qualifying EIS shares if they were issued before the date of the gain you want to defer arose and you must still hold them at the date of the gain. Also to be eligible for deferral relief the EIS shares must be issued to you during the period beginning one year before, the date of the disposal you wish to claim relief for and ending 3 years after. You must also have received the relevant EIS3 certificate.
A deferred gain is revived when there is a chargeable event, this can be when you dispose of the EIS shares, you cease to be resident in the UK or as the shares cease to be eligible shares because the company is prevented from being a qualifying company among other things.
Please note, investing in start-up businesses does involve a certain amount of risk including lack of dividends and loss of investment if the business is unsuccessful, however they can also be very tax efficient.
This article is to provide information on the tax benefits of investing in EIS shares and should not be construed as financial advice. Separate financial advice should be sought if you are considering investing in EIS.
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