EIS – Enterprise Investment Scheme
EIS (Enterprise Investment Scheme) was launched in 1994 and was created to encourage investment in small businesses in UK. The scheme has been designed to assist small unquoted trading companies raise funding by offering significant tax savings to investors. These savings include tax relief available from Income Tax, Capital Gains Tax and Inheritance Tax.
The scheme provides considerable benefits, both in minimising the tax payable on any gains you make when you dispose of your shares, as well as reducing any potential loss should it not work out.
To follow is a summary of the key highlights of the scheme:
What is EIS?
The Enterprise Investment Scheme (EIS) provides substantial tax relief to investors and was launched to boost investment in small companies trading in UK.
Historically, investing in companies that are not listed on a stock exchange was considered high risk. EIS was introduced to allow some compensation for the higher risk by providing significant tax relief on the investments – through Income Tax, Capital Gains Tax and Inheritance Tax relief on investment in qualifying shares.
What are the benefits of EIS?
EIS is seen to be one of the most tax efficient investments for UK investors. The scheme was created to enable small, unquoted trading companies raise funds by offering a number of tax incentives to investors.
Provided qualifying shares are held for a minimum period of 3 years, the following tax benefits can be received:
- Investors can reduce their Income Tax liability by up to 30% of the value of the share investment, up to a maximum subscription of £1 million per year, which equates to a maximum tax relief of £300,000 reclaimed tax in any year (provided the investor has sufficient Income Tax liability).
- Investors can ‘carry back’ the investment; in other words, they can elect to treat all or part of the subscription as if it was acquired in the prior tax year. This allows for the cost of the shares to be split across two years thereby utilising the Income Tax liability from both years, in order to gain the full benefit of the relief available.
- Any gains on the value of the shares are free from Capital Gains Tax.
- Any losses on the shares can be set off against other income or capital gains in the same year.
- The full investment value is free from Inheritance Tax once shares have been held for 2 years.
- Investors can claim an unlimited value of Capital Gains Tax deferral for gains invested in EIS up to 1 year prior to or 3 years post the gain. There is no minimum period you have to hold the shares for.
This scheme is ideally suited to those investors who would benefit from deferring a large portion of capital gains on assets sold. Effectively the investor would receive an ‘interest free loan’ from the government as, instead of paying the Capital Gains Tax due, this tax is deferred and only becomes payable from when the EIS shares are sold.
However investors should be aware that unquoted companies can often be difficult to value and to sell and therefore any investment in an entrepreneurial venture can be higher risk and should be seen as a long-term investment.
How does EIS work?
EIS allows investors to provide funding to a company by purchasing qualifying shares.
Below is a brief outline to explain how EIS works for investors and businesses seeking additional funding:
- Individuals investing via EIS can invest up to a maximum of £1 million per tax year. This can be invested in one company or across multiple qualifying small businesses.
- Investments are made via stock purchased in unquoted companies and qualifying shares must be held for a minimum of 3 years.
- Investors can receive tax savings in personal Income Tax relief of up to 30% of the funds invested; in other words you will be able to claim back 30% of the cost of the shares, off your Income Tax liability for that same tax year.
- The investment is exempt from any Capital Gains Tax (CGT) resulting from disposal of the shares after three years.
- Investors can defer the payment of CGT on any gains realised on other assets if the gains are invested in shares of a qualifying EIS company. The EIS investment must take place within 12 months prior to or less than 36 months post the gain. There is no maximum value for deferral. This deferral relief can be claimed by investors with more than 30% stake in the company and is available to both individuals and trustees.
- If there is a loss arising from the disposal of the shares, this can be set off against capital gains or income in the same year.
- In addition, investments made via EIS are exempt from inheritance tax (if held for longer than two years).
- Any business gaining investment via the scheme has a maximum amount of £5 million in total funding available in a 12 month period via the venture capital schemes or state funding. These include EIS (Enterprise Investment Scheme), SEIS (Seed Enterprise Investment Scheme) and VCTs (Venture Capital Trusts).
- The business must have a ‘permanent establishment’ in the UK and have been in existence and trading for more than four months.
- The company must be unquoted and cannot be listed on the London Stock Exchange or any other recognised stock market.
- The company should not be controlled by another company, but it may have qualifying subsidiaries.
- The company must have less than have 250 full-time employees.
- The total gross assets in the business must be less than £15 million in value (if the business is the parent of a group, this figure applies to the total assets in the whole group).
- The business must trade within an approved qualifying sector.
What are the limitations of EIS?
EIS can provide significant tax savings, however in order to qualify for EIS, there are a number of requirements that need to be met. There are also a number of restrictions to be aware of before you consider raising funding or investing via the scheme. A few key points are set out below:
Restrictions for investors:
- Investors may not own more than 30% of the business which they are funding and should not have any other form of controlling interest in the company.
- Investors are not allowed to be connected with or employed by the company as an employee, partner or director of the company.
- The EIS shares issued by the company to the investor must be paid in full, and in cash, when they are issued.
- Shares issued in qualifying companies must be held for a minimum period of at least three years.
- There should be no arranged exit schemes for investors or shareholders.
- Investors must be over 18 years old.
Restrictions related to the business:
- All funding received via EIS must be actively engaged in qualifying business activity within two years.
- The company must not be a listed company or have any intention of becoming a listed company at the time of the EIS investment.
- For full details of the rules for qualifying for EIS, please refer to the HMRC website.
Please contact us on 020 8108 0090 for more information and to arrange an appointment to discuss your investment or funding needs and how we can maximise the gains available via EIS.
Please note that this summary does not cover all the detailed EIS rules and only relates to shares issued after 6 April 2012. This summary is based on current understanding of United Kingdom tax law and practice and should not be interpreted as the provision of tax, legal or financial advice.