The Enterprise Investment Scheme (EIS) provides tax incentives in the form of a variety of income tax and capital gains tax (CGT) reliefs to investors who invest in smaller, unquoted, trading companies. Let’s look at each, briefly:
Income Tax Relief
Individuals who subscribe for shares in an EIS qualifying company will receive tax relief of 30% on the cost of the shares, which is offset against the individual’s Income Tax liability for the year in which the investment is made.
There is no minimum amount an investor can invest in any one company; however there has been a maximum investment of up to £1 million since 2012/13
It is possible to ‘carry back’ all or part of the investment to the preceding tax year as long as the limit for relief is not exceeded for that year. The effect being, for example, that a subscription of £2 million EIS shares may be made in 2016/17 with a carry back of £1 million to 2015/16.
An individual is able to reduce his tax liability to zero through EIS relief, which is great for the investor, allowing the taxpayer to claim back any repayable tax deducted at source, such as PAYE.
Capital Gains Tax Exemption
No CGT is charged on a gain on the disposal after the minimum holding period of EIS shares on which Income Tax relief was given and not withdrawn.
Capital Gains Tax Deferral Relief
CGT can be deferred if capital proceeds are invested in EIS shares even if the investor is connected. The minimum or maximum EIS investments do not apply to deferral relief.
A gain deferred comes back into charge in the year (after deducting the CGT annual exemption if available) under certain conditions such as when the EIS investment is disposed of, or there is a deemed disposal or the shares cease to be qualifying EIS shares
Warning: Read two or three times!
For example: Income Tax, CGT and CGT deferral
- Wesley accidentally made a capital gain of £50,000 in 2015/16.
- He invests £100,000 into an EIS company in 2016/17. In 2021 he sells his investment for £200,000.
- He decides to claim income tax and CGT deferral relief by carrying back £50,000 of his investment to 2015/16. This gives him income tax relief of £15,000 (£50,000 x 30%) and CGT deferral relief of £14,000 (28% x £50,000).
- He claims income tax relief in 2016/17 of £15,000 (£50,000 x 30%).
- In 2021 he makes a gain of £100,000 (as he bought shares at £100,000, and sold for £200,000), this would be exempt from CGT however as he deferred £50,000 of gains in 2015/16, tax becomes payable on his deferred gains of £10,000 (£50,000 x 20%).
If EIS shares are disposed of at a loss at any time, the loss (after any Income Tax relief has been taken into account) can be offset against income for that year and the previous year instead of being offset against capital gains.
The Finance Bill 2017 amends the requirements for the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT) to:
- Clarify the EIS and SEIS rules for share conversion rights: the rights to convert shares from one class to another will be excluded from being an arrangement for the disposal of those shares within the no pre-arranged exits requirements for the EIS and SEIS for shares issued on or after 5 December 2016.
- Provide additional flexibility for follow-on investments made by VCTs in companies with certain group structures, to align with EIS provisions, for investments made on or after 6 April 2017
- Introduce a power to enable regulations to be made in relation to certain share-for-share exchanges to provide greater certainty to VCTs, which will take effect on the date from which Finance Bill 2017 receives Royal Assent.
- A consultation proposes options to streamline and prioritise the advance assurance service, thereby there is indication HMRC are planning to take this process online to minimise the waiting times of decisions being mad