Enterprise Investment Scheme (EIS) -EIS tax relief

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Introduction 

The Enterprise Investment Scheme (EIS) is a type of scheme many individuals may decide to invest in. When they do this, investors can claim 30% income tax relief against their overall income tax bill.

EIS investments were introduced in 1994. An EIS investment has a range of tax benefits for individuals, in return for becoming a shareholder. Please note that the types of companies that offer EIS investment opportunities are early-stage businesses and therefore the investments into these new companies are high risk.

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). 

Initial considerations

Under VCT schemes, you can invest directly in a company or enterprise that qualifies for one of these schemes. The companies that offer EIS investment opportunities often invest in knowledge-intensive activities. To qualify for the scheme, they must be operating a qualifying trade. There are more guidelines on the HMRC website regarding what HMRC view as EIS qualifying companies.

When investing, you will also need to ensure that you meet the conditions for investors. In addition, the company or enterprise will need to meet the requirements for the scheme.

The EIS scheme investments will need reporting on your Self-Assessment Tax Return. Please note that it is possible to overlook this when you complete your tax return; therefore, keep the details safe. Another article on this site details this and other potential Self-Assessment tax errors. 

Enterprise Investment Scheme overview

The scheme aims to help small companies, often with a high-risk nature, in their activities. The help comes by raising finance by offering tax relief on new EIS shares in an EIS-qualifying company. 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 for EIS-qualifying companies (£2 million for knowledge-intensive companies).

Important to note that the EIS scheme is very attractive to potential investors. This is because there is a ‘carry back’ feature. In turn, you can carry back EIS investments to the previous tax year. 

How to claim EIS tax relief and the CGT exemption 

Income Tax Relief and the EIS tax benefits

The scheme allows you to claim tax relief at 30% on investments up to £1,000,000 in any tax year. It gives a maximum tax reduction in a tax bill (assuming your tax bill is this high) in any year of up to £300,000.

What’s more, the allowances and EIS tax relief are for individuals. A married couple could invest up to £2 million each tax year, entitling 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.

With regards to EIS eligibility, people who are connected to the company will not qualify. Connections come in terms of employment or financial interest. If such individuals invest in the company offering the investment, they are not entitled to Income Tax Relief on their shares.

The scheme can be a great way to invest funds. This comes in the hope of 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 is that the investor can hold the shares for longer. It will then potentially allow the investor to accrue their CGT exemption over an extended 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 additional information:

  • Loss relief and;
  • CGT deferral relief. 

The EIS Scheme -EIS carry back and claiming for tax relief 

EIS carry back

An EIS ‘carry back’ feature is available when an individual invests under the scheme. The EIS relief `carry back’ 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 from the previous 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 invests in 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.

Please visit the HMRC website article if you need more details and information on the EIS scheme. 

Final thoughts

Although the Enterprise Investment Scheme is not suitable for all, it could be worth considering. If you have savings that are not earning a reasonable interest rate, this is one option you could consider.

It is important to note that the EIS tax relief is attractive. This is because you can save a fair amount of personal tax. However, this also does depend on your level of earnings.

Finally, you will need to do detailed research before investing in any company. As part of this, you should also look at how your potential EIS fund investment might perform in the future.

Link to Contractor Advice UK group on

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: August 1st, 2022 / Categories: Self-Assessment /

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