Enterprise Investment Scheme
Enterprise Investment Scheme
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. It can be very attractive to investors investing into smaller businesses, as it can help to offset a number of the risks.
There are five current tax benefits 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.
- The maximum in respect of which a subscriber may obtain income tax relief in any year is £1 million.
- 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 £1.5m may be invested of which £500,000 could be applied to the 2011/12 tax year.
- Individuals each have an EIS allowance of £1million so a married couple could invest up to £2million per tax year.
- Income tax relief is limited to the amount which reduces the individual's income tax liability for the year to nil.
Capital gains tax (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or three years after commencement of trade, if later, provided the EIS initial income tax relief was given and not withdrawn on those shares.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.
Inheritance tax (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.
Capital gains tax (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 £1million per annum and can also be claimed by investors (individuals or trustees) whose interest in the company exceeds 30%.
- 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 42p in the £1 for a 40% tax payer or 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 of 18% or 28% as applicable.
Whilst these tax relief can go a long way in offsetting some of the risks associated with investing into smaller businesses, remember never to let the 'tax tail wag the investment dog'. The tax treatment of investments depend on the personal circumstances of each investor and may be subject to change in the future, so be sure to seek professional advice before making any investment decisions if you are unsure.
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Please be aware of the risks involved. The value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. Past performance is no guarantee of future performance. Tax treatment depends on your individual circumstances and may be subject to change. If in any doubt, please seek advice.
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