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.
EIS shares, otherwise known as The Enterprise Investment Scheme, was designed originally by the Government to provide investors with an incentive to invest in smaller unquoted companies. The tax benefits of EIS shares are available when new shares are bought only, so 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 shares.
At present, there are five EIS shares benefits:
- Income tax relief
In the overall investment, 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 shares entitlement in the previous tax year can treat all or part of the cost of the investments as subscribed in that year; up to 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 EIS shares must be held. The deferred capital gain is brought back into charge whenever the EIS 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Gains Tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.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 shares Investments are generally exempt from Inheritance Tax after two years of holding the investment.
What Can EIS Shares Be Used For?
The raised money must be used for a qualifying business activity, including:
- Preparing to conduct a qualifying trade (within 2 years of investment)
- A qualifying trade
- Development and research that is expected to result in qualifying trade
How Do EIS Shares Work?
EIS shares are designed in order to help companies to raise money to assist with business growth. This is achieved by offering tax reliefs to individual investors that buy shares in companies. Under the Enterprise Investment Scheme, up to £5 million can be raised, as well as a maximum of £12 million in the lifetime of the company, including the amount received from other venture capital investment schemes. For this, the company must have received investment within 7 years of its first commercial sale under a venture capital scheme.
For EIS shares, the rules of the scheme must be followed so that the investors can claim and keep the EIS tax reliefs involving their shares. For companies who have been trading for less than two years, a similar scheme is in place, known as the SEIS scheme (Seed Enterprise Investment Scheme).
If you would like to find out more information about alternative investment capital and the information you will need for EIS shares and convertible loan note, don’t hesitate to get in touch with our team at CSS Partners.
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