The Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) was designed by the Government to provide investors with an incentive to invest in shares in small, growing, unquoted companies. Unquoted in tax terms covers 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 perks 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 20% of the amount invested. The minimum subscription is £500 per company and the maximum per investor is £500,000 per annum. Where an individual subscribes for qualifying shares before 6 October in a tax year, a claim may be made to carry back one half of the amount subscribed to the previous tax year, subject to a maximum of £50,000.
- CGT 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 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.
- CGT 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Gains Tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.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 48p in the £1 for a 40% tax payer if the investor realises a total loss. Alternatively, the losses can be offset against Capital Gains Tax at the prevailing rate - 18% from tax year 2008/09.
- Inheritance Tax Exemption – EIS Investments are generally exempt from Inheritance Tax after two years of holding such investment.
The summary above is intended only as a general guide to the current position under UK law and H M Revenue & Customs practice and may not apply to certain classes of person (such as dealers in securities). Any person who intends to seek to obtain EIS Relief in respect of his investment, or who is in any doubt as to his tax position, or who is subject to tax in a jurisdiction outside the UK, should consult a professional adviser.