The Enterprise Investment Scheme (EIS) is a type of scheme that many individuals may decide to invest in. When they do this, they may receive 30% income tax relief, against their overall income tax bill.
In general, Venture Capital Trust schemes (VCT), of which EIS is one, offer tax relief to UK individuals. These schemes encourage individuals to invest in companies and social enterprises and in return they receive tax relief. Notably, the companies and enterprises are not on any recognised stock exchange. The schemes that are out there that you can take part in, are:
- Enterprise Investment Scheme (EIS).
- Seed Enterprise Investment Scheme (SEIS).
- Social Investment Tax Relief (SITR).
Under VCT schemes, you can invest directly in a company or enterprise that qualifies for one of these schemes. The types of companies that offer EIS investments are often investing in knowledge intensive activities. To qualify for EIS, they must be operating a qualifying trade. There are more guidelines on the HMRC website with regards to what HMRC view as EIS qualifying companies.
When investing, you will also need to make sure that you meet the conditions for investors. In addition, the company or enterprise will need to meet the conditions for the scheme.
The EIS scheme investments will need reporting on your Self-Assessment Tax Return. Please note, it is possible to overlook this when you complete your tax return, therefore keep the details safe. We detail this and other potential tax return oversights in our article which covers Self-Assessment tax errors.
The Enterprise Investment Scheme overview
The scheme aims to help small companies, often with a higher-risk nature in their activities. The help comes by way of raising finance by offering tax relief on new EIS shares in companies that qualify. From the investor’s point of view, this is a tax-efficient way to make EIS investments in small start-up companies. What’s more, a relief of £1,000,000 per person per year is available in qualifying companies (£2 million for knowledge-intensive companies).
Important to note, the EIS scheme is very attractive to potential investors. This is because there is a ‘carry back’ feature. In turn, this means that you can carry back EIS investments to the previous tax year.
EIS Tax relief and exemption
Income Tax Relief
The scheme allows you to claim tax relief at 30% on any investments up to £1,000,000 in any one tax year. It gives a maximum tax reduction in a tax bill (this assumes that your tax bill is this high) in any one year of £300,000.
What’s more, EIS allowances and EIS tax relief are for individuals. A married couple could invest up to £2 million each tax year and it would entitle them to EIS tax relief up to this amount. In addition, you must hold the shares for at least three years from the date of issue. Failing to do this will result in HMRC withdrawing the tax relief.
People who are connections of the company will not qualify. Connections comes in terms of employment or financial interest. If such individuals invest in the company that is offering the investment, they are not entitled to Income Tax Relief on their shares.
EIS can be a great way to invest funds. This comes in the hope for a better return in terms of capital growth than other ways of investing or saving. The main reason here is the favourable tax treatment. This is because the scheme allows you to save 30% of your tax bill, subject to the limits mentioned earlier.
Capital Gains Tax (CGT) exemption
Please take note, any gain is Capital Gains Tax free, and this is providing that:
- you hold the shares for at least three years; and
- you claim the income tax relief on them.
A further consideration here is that the investor can hold the shares for a longer period of time. It will then potentially allow the investor to accrue their CGT exemption over a longer period, which can be a great attraction.
Further tax reliefs are available in respect of EIS. Please take a look at HMRC’s guidance on these areas for further information:
- loss relief and;
- CGT deferral relief.
The EIS Scheme -carry back and claiming tax relief
Please note, there is a ‘carry back’ feature that is available, when an individual invests via the EIS. The feature will allow you to treat all or part of the cost of shares that you acquire in one tax year as though you had acquired those shares in the prior tax year. Relief is then given against the Income Tax liability of the prior year, rather than against the tax year in which you bought those shares. In addition, this is subject to the overriding limit for relief for each year.
Claiming for your tax relief
An investor who makes an investment via the Enterprise Investment Scheme, can claim relief once the company sends through an EIS3 form. Once the investor receives this, they can make their claim through their Self-Assessment tax return. They will do this in the tax year that covers the share issue, although as mentioned earlier there is also the carry back feature.
If you would like more detail and information on the EIS scheme, please visit the HMRC website article.
Although the Enterprise Investment Scheme is not suitable for all, it could be worth considering. If you have savings that are not earning a good interest rate, this is one option that you could think about.
Important to note, the EIS tax relief is attractive. This is because you can save you a fair amount of tax however this also does depend on your earnings.
As a final thought, you will need to do your own detailed research before investing in any company. As part of this, you should also look at how your potential EIS investment might perform in the future.
Link to Contractor Advice UK group on