Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) was introduced in 1994 to encourage investment in small, high risk companies. The Enterprise Investment Scheme provides a number of tax incentives for individuals who subscribe for shares in small, unquoted, trading UK companies that meet the company criteria for EIS.

Income Tax Relief

Individuals who subscribe for EIS shares can claim 30% income tax relief in the year of subscription or in the previous year. The individual cannot be ‘connected’ with the company they are investing in. ‘Connected’ is when you along with your ‘associates’ have more than 30% of the shares in the company or you are an employee or director of the company.

 

Although there are currently no restrictions to the minimum amount that can be invested, there is a restriction to the maximum amount you can invest of £1 million (£2 million when investing in knowledge intensive companies). The investor is also required to hold the shares for a minimum term of three years. If the shares are disposed of within this timeframe then the income tax relief will be clawed back.

 

Example of EIS Income Tax Relief

An investor subscribes £10,000 in EIS shares

EIS Income Tax Relief available to the investor is £3,000 (£10,000 x 30%)

 

Capital Gains Tax (CGT) Exemption

There is no CGT payable on any gain arising from the disposal of EIS shares, provided that the shares were held for three years and income tax relief was given in full and not withdrawn. It is important to note that if no income tax relief was claimed then there will be no CGT exemption on the disposal of those shares.

 

CGT Deferral Relief

CGT Deferral Relief is available when an individual reinvests any capital gains into the subscription of EIS shares, at any time one year before and three years after the gain arose. You can avail of this relief whether you are connected to the company or not.

 

The tax deferred becomes payable at the earliest of;

• the disposal of the EIS shares,
• the investor becomes non UK resident within three years of the investment
• the EIS shares are no longer eligible.

 

Share Loss Relief

If EIS shares are disposed of at a loss then that loss (after any Income Tax Relief given) can be offset against income in the year in which the shares were disposed of and the previous tax year.

 

How to Claim Relief

Income Tax Relief or CGT Deferral Relief can be claimed in an individual’s tax return only when they have received a Form EIS3 from the company, as proof that the shares are eligible for EIS. The Form EIS3 should then be retained by the individual as part of their records.

 

Kerry Donaghy is a Chartered Accountant at Abac Chartered Accountants

This article is for general information only. You are recommended to seek professional advice before taking action on the basis of the contents of this article.