Enterprise Investment Schemes
Enterprise Investment Schemes (EIS)
The Enterprise Investment Scheme (EIS) was a replacement for the Business Expansion Scheme (BES), taking effect from 1st January 1994. It was intended to help types of small, higher-risk, unquoted trading companies to raise capital by providing a range of tax reliefs for investors.
Income tax relief at 30% is given for qualifying investments issued on or after 6th April 2011. Previously relief was given at 20%. The maximum annual investment under EIS increased to £1,000,000 from April 2012. The relief is given as a reduction to the investor’s tax liability.
Income tax relief is given in the year of assessment in which the shares are issued, rather than when the investment is actually made. The claim for income tax relief cannot be made until the company has carried out a qualifying trade for four months.
Relief is withdrawn if the shares are disposed of within three years, except to a spouse and not on the death of the investor.
An investor may carry back income tax relief to the previous tax year by claiming that the qualifying shares are treated as having been issued in the previous year and, as long as the annual limit for the purposes of calculating income tax relief in any particular year is not exceeded.
A capital gain can be deferred by reinvesting the gain into an EIS company. Where only this relief is claimed (CGT deferral relief), there is no upper limit:
- Reinvestment must take place in the period beginning one year before and ending three years after the disposal giving rise to the gain
- The deferred gain is brought into charge when the EIS shares are disposed of unless a further qualifying investment is made
- The CGT rate applied to the deferred gain will be the rate at the time the deferral ends and the gain becomes liable to tax
- Gains arising on the disposal of EIS investments that qualified for income tax relief are exempt from CGT as long as the shares have been held for three years.
- Losses on EIS investments are allowable where either income tax relief or CGT deferral relief has been obtained, although a deduction is made for the initial income tax relief that has been given. A loss can be set against either chargeable gains or income.
If the shares are held for at least two years they qualify for 100% business property relief as unquoted companies and so attract 100% relief from inheritance tax.
Tax relief is given to qualifying individuals i.e. someone not connected with the company when subscribing – though they can subsequently become a paid director of the company.
Non-UK residents are eligible but can only claim relief against liability to UK income tax. No income tax relief is given if more than 30% of the capital is acquired, although CGT deferral relief would still be available.
A qualifying company must be unlisted when the shares are issued and there must be no arrangements at that time for it to become listed. Also, a company raising money under an EIS must have fewer than 250 full-time employees at the date on which the shares were issued.
The gross assets of the company must not exceed £15m immediately before the issue of the shares nor £16m immediately afterwards.
To qualify for relief the company must not have raised more than £5m under all venture capital schemes in the twelve months ending on the date of investment – if the limit is exceeded, none of the shares will qualify for relief under the EIS.
There must not be any pre-designed exit conditions to mitigate investment risk. Investing in unlisted trading companies is very high risk and there is a strong possibility of the companies failing. An EIS must be held for 3 years to retain the income tax and CGT relief, even after that period it may be difficult to dispose of the shares, as the market is likely to be very illiquid or even non-existent.
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