The Enterprise Investment Scheme

Working Examples

1. Income tax relief
From 6 April 2011, qualifying individuals can credit an amount equal to 30 per cent of the amount subscribed for eligible shares against their total liability to income tax for the tax year in which the shares are issued. The relief is available against a UK income tax liability irrespective of whether or not the investor is resident in the UK. The amount of relief given cannot exceed an individual's tax liability.

Example	£
Gross investment in shares	100,000
Less: income tax relief at 30%	30,000
Net cost of investment	70,000

A qualifying individual can claim to carry back part of their subscription to the previous tax year. The maximum amount which may be carried back is £500,000. In this instance, an individual can subscribe and claim for EIS benefits for up to £1,000,000 of EIS qualifying shares, in the current tax year.

2. Capital gains tax relief
To the extent EIS income tax relief is available and not liable to be withdrawn, any capital gain accruing to the original investor on the disposal of his shares shall be exempt from capital gains tax, provided that the shares have been held for at least three years.

Example	£
Realised value of shares after 3 years	250,000
Less: original gross investment	100,000
Tax Free Gain	150,000

3. Loss relief
If the original investor disposes of his shares at a loss, the net loss (after EIS income tax relief) may be set against other taxable income or chargeable gains, at the election of the investor.

Example	£
Realised value of shares	0
Gross investment in shares	100,000
Less: income tax relief at 30%	30,000
Loss before tax relief	70,000
Tax relief at 50% *	35,000
Net loss	35,000

*Assumed the net loss was offset against other income taxable at 50% as opposed to chargeable gains which are taxable at 28%.

4. Capital gains tax deferral
The liability to capital gains tax arising on the disposal of any asset may be deferred by investing the gain in eligible shares. The investment must be made within the period beginning one year before and ending three years after the event which gives rise to the gain being deferred.

Although there is a limit of £500,000 for income tax relief and capital gains tax relief, there is no limit on the amount of capital gains that can be deferred.

Example	£
Gross investment	500,000
Less income tax relief (30% of £500,000)	150,000
Cost of investment	350,000
Capital gains tax liability deferred*	140,000
Net initial cost of investment	210,000

*Assumed at 28%, the gain is deferred until there is a chargeable event, such as a disposal of shares or, if earlier, breach of the EIS rules. Entrepreneurs who sell their business have to choose between Entrepreneurs relief of 10% on their gain or EIS deferral relief and then pay capital gains tax at the rate that is in force when the EIS investment is sold.

5. Inheritance Tax Exemption
Like any other 'unquoted' investment, an EIS investment will qualify for inheritance tax relief if it is held for at least two years.

An individual wanting to benefit from investment in EIS shares will need to check with their financial adviser. Companies must fulfil certain criteria to be eligible for EIS investment, but they will normally confirm they are eligible at the time of the fundraising. The qualifying company must have gross assets of no more than £7m prior to the fundraising.

Further information on EIS can be found on the Enterprise Investment Scheme Association's website: www.eisa.org.uk.

The statements above are 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 their professional advisers.

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