The Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme was designed by the Government to provide investors with an incentive to invest in smaller unquoted companies. Unquoted in tax terms covers most AIM and Plus-quoted shares.
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 an amount equal to 30% of the amount invested. The minimum subscription is £500 per company and the maximum per investor is £500,000 per annum. Any individuals who have not used their EIS entitlement in the previous tax year can subscribe for up to £1,000,000 of EIS qualifying shares in the current tax year and treat £500,000 as subscribed in the previous year.
- Capital Gains Tax Deferral Relief – Tax on gains realised on a different asset can be deferred indefinitely, where disposal of that asset was less than 36 months before the EIS investment is made or less than 12 months after it. Deferral relief is unlimited, in other words, this relief is not limited to investments of £500,000 per annum.
- Capital Gains Tax Freedom – 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Gains Tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.
- Loss Relief – If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such loss can be offset against the investor's capital gains or income in the year of disposal or the previous year. For gains offset against income tax, the net effect is to limit the investment exposure to 35p in the £1 for a 50% taxpayer if the investor realises a total loss. Alternatively, the losses can be offset against Capital Gains Tax at the prevailing rate of 28%.
- Inheritance Tax Exemption – EIS Investments are generally exempt from Inheritance Tax after two years of holding the investment.
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Significant Changes from April 2012
In the most recent budget, the Chancellor announced a number of very significant changes to this scheme. The aim is to help smaller companies to obtain finance by increasing the incentives for potential investors.
The changes to be introduced in the Finance Bill 2012 will increase:
- The thresholds for the maximum size of qualifying company for EIS to 250 employees and gross assets of £15 million
- the maximum annual amount that can be invested in an individual company to £10 million
- the annual amount that an individual can invest under EIS to £1 million.
The changes introduced in 2011 and proposed for 2012 are still subject to State Aid approval.
Seed Enterprise Investment Scheme (SEIS) read more
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The level of tax treatment depends on your individual circumstance. Tax breaks exist under current legislation and are subject to change. Tax breaks alone should not be the sole reason to invest into tax efficient investments. Investment in private companies carries a high risk: it is highly speculative and there is no recognised market for these shares. Investors in private companies must have no need for liquidity and must be able to withstand a total loss of investment. Past performance is not an indication of future performance and investments may go down as well as up. Private equity investment and certain investments offered by CSS Partners are not suitable for all investors.
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