The Enterprise Investment Scheme was designed by the Government to provide investors with an incentive to invest in smaller unquoted companies.
The tax benefits of EIS are only available when new shares are bought. If the existing shares of an EIS-eligible company are bought on the secondary market then none of the tax breaks are available via EIS.
There are five current EIS tax reliefs:
- Income tax relief
Provided an EIS qualifying investment is held for no less than three years an individual can reduce their income tax liability by 30% of the amount invested. There is no longer a minimum investment level and the maximum per investor is £1,000,000 per annum. Individuals who have not used their EIS entitlement in the previous tax year can treat all or part of the cost of the investments as subscribed in that year, up to the maximum annual investment limit for the applicable year.
- Capital Gains Tax Deferral Relief
Tax on gains realised on a different asset can be deferred where the EIS investment is less than 12 months before or 36 months after the disposal of the asset. There is no minimum period for which the shares must be held. The deferred capital gain is brought back into charge whenever the shares are disposed of (or are deemed to have been disposed of under EIS legislation). Deferral relief is unlimited.
- Capital Gains Tax Exemption
No Capital Gains Tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.
- Capital Protection
If EIS shares are disposed of at any time at a loss, such loss less any income tax relief previously given, can be offset against the investor’s income in the year of disposal or the previous year. For gains offset against income tax, the net effect is to offer investment protection of 61.5p in the £1 for a 45% taxpayer. Alternatively, the losses can be offset against Capital Gains Tax at the prevailing rate of up to 28%.
- Inheritance Tax Exemption – EIS Investments are generally exempt from Inheritance Tax after two years of holding the investment.