The Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme is a government scheme designed to provide investors with an incentive to invest in smaller unquoted companies. Unquoted for these purposes includes 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 20% of the amount invested. The minimum subscription is £500 per company and the maximum per investor is £500,000 per annum. From the 6th April 2009, 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.
- 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 tax year.
- 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Gains Tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.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; 10%, 18% & 28% from 2010/11.
- 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 as at July 2010 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.
The level of tax treatment depends on your individual circumstance. Tax breaks exist under current legislation and are subject to change. CSS Partners LLP is an appointed representative of Charles Street Securities Europe LLP (CSS) which is authorised and regulated by the Financial Services Authority.