Enterprise Investment Scheme (EIS) -EIS tax relief

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Introduction 

As a contractor who runs your own company, you may wish to maximise your personal savings. The HMRC Enterprise Investment Scheme (EIS) is a type of UK Venture Capital Trust (VCT) scheme. In the UK, many individuals may decide to invest in one or more of these. This includes limited company contractors, other business owners, and UK individuals. When a UK contracting professional invests in EIS, HMRC allows them to claim tax relief on the investments via their tax return if they meet the EIS eligibility rules. Indeed, the tax relief is up to 30% against their overall income tax bill. In this short guide we’ll research what is EIS tax relief (HMRC) and how the scheme works. Besides EIS income tax relief, we’ll investigate HMRC EIS eligibility and the EIS tax benefits.

EIS investments were introduced in 1994. The scheme offers a range of tax benefits for individuals in return for becoming shareholders. What’s more, the types of companies offering EIS investment opportunities are early-stage businesses. Therefore, investments in these new companies are high risk. If you’re considering investing, you should look for an EIS investment opportunity. There are plenty of guides and helpful information online regarding advice from websites that specialise in these types of investments.

This guide will examine HMRC EIS guidance and discover the Enterprise Investment Scheme tax benefits. We’ll research the EIS scheme requirements and the official rules on claiming tax relief on EIS investment (UK). Before investing, it’s good to know how the income tax relief under the scheme works. Therefore, if you want to benefit from some EIS tax breaks, it’s good to understand how the rules work first.

Initial thoughts 

What are VCT schemes?

In general, Venture Capital Schemes (VCT), of which EIS (UK) is one, offer tax relief to UK individuals (not companies). These schemes encourage individuals to invest in companies and social enterprises. In return, they receive Enterprise Investment Scheme tax relief. Moreover, these companies and enterprises aren’t on any recognised stock exchange. Therefore, the schemes available which you can take part in are:

  • Enterprise Investment Scheme (EIS).
  • Seed Enterprise Investment Scheme (SEIS).
  • Social Investment Tax Relief (SITR).

Individuals can invest in one or more of these schemes in the UK and receive tax relief against their UK income tax bill.

Contractors & individuals who invest in VCT schemes

As a limited company contractor or individual, how do VCT schemes work? You can invest directly in a company or enterprise that qualifies for one of these schemes. What’s more, the types of businesses which offer EIS opportunities are often knowledge-intensive companies (KIC). Also, they must operate a qualifying trade to qualify for the scheme. There’s more on the HMRC website regarding what EIS qualifying companies are, how to meet the eligibility criteria and how to apply for this. To sum up, it’s key to note that investing in EIS-qualifying shares in new start-ups is done personally rather than through your UK contractor limited company or other business.

When investing in a qualifying company, you must ensure you meet the conditions for EIS investor requirements. The company or enterprise must also meet the EIS general requirements for the scheme.

Your investment in EIS shares under the scheme is reported on your Self-Assessment Tax Return. However, it’s possible to overlook this when you complete your tax return. Therefore, it’s key to keep the details of any company investments under the scheme safe. Another guide on this site details more about this and other potential Self-Assessment tax errors.

Common questions

Those considering investing under the scheme may have specific questions before investing. These questions on investing in EIS may include:

  • What are EIS investments?
  • How does EIS work?
  • Where can I find EIS tax-efficient investments?
  • How to claim EIS relief?
  • How do you report EIS?

In this guide, we’ll examine what to consider when investing in EIS and the various tax benefits of EIS schemes. We’ll research EIS eligibility and EIS requirements and find out how EIS scheme tax benefits work for individual taxpayers. 

Enterprise Investment Scheme (UK) overview

The scheme aims to help small companies, who are often high-risk in nature, with their activities. The help comes from raising finance and offering individuals EIS investment tax relief on new shares in a qualifying company. The money raised for the company will help fund its activities and grow its business. From the investor’s point of view, it’s a tax-efficient way to invest in small start-up companies. An annual EIS scheme relief of £1,000,000 per person is available for qualifying companies (£2 million for knowledge-intensive companies).

It’s important to note the scheme is very attractive to potential investors. This is because, besides receiving income tax relief, there’s an EIS carry-back relief feature. In effect, you can claim EIS income tax relief carry-back relief when you carry back investments under the scheme to the previous tax year. If you plan to invest, you’ll require a financial adviser to help set this up. Many financial advisers are out there, and you can research locally or online. 

How to claim EIS tax relief & what is the CGT exemption? 

Income Tax Relief & EIS tax benefits

There are several EIS benefits, mainly the HMRC Enterprise Investment Scheme relief, which can be claimed at 30% on EIS-qualifying 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. Moreover, this scheme’s allowances and tax relief are for individuals. A married couple could invest up to £2 million each tax year, entitling them to the maximum amount of tax relief available of £600,000.

When you invest under the scheme, you must hold the shares for at least three years from the issue date to be eligible for tax relief. Failing to do this will result in HMRC withdrawing the EIS scheme tax relief.

According to the EIS eligibility rules, people connected to the company won’t qualify. Such connections are usually in terms of employment or financial interest. Under the EIS eligibility rules, if such individuals invest in the company offering the investment, they’re not entitled to Income Tax Relief on their shares. Therefore, to qualify for the EIS scheme benefits this provides, you must be an EIS-qualifying investor.

This type of venture can be a great way to invest funds, and several tax benefits are available. Investors hope to gain a better return in terms of capital growth than other ways of investing or saving. The main reason is the favourable tax treatment. The scheme allows you to save 30% of your tax bill, subject to the EIS limits mentioned earlier. 

Capital Gains Tax (CGT) exemption   

Please take note, any gain the EIS tax efficient investments make are Capital Gains Tax-free, and this is providing:

  • 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. This could potentially allow the investor to accrue their CGT exemption over an extended period, which can be a great attraction and another one of the tax benefits under this type of venture.

Some further tax reliefs are available under the scheme. Please take a look at HMRC’s guidance under helpsheet HS297 on these areas for extra information:

  • EIS Loss relief and;
  • CGT EIS deferral relief.

These are complex tax areas; therefore, you should seek professional advice before investing. 

Other thoughts on the scheme -EIS carry back & claiming EIS relief (HMRC) 

How does HMRC EIS relief carry back work?

An EIS ‘carry back’ feature is available when an individual invests under a qualifying company. The feature allows you to treat all or part of the cost of shares you acquire in one tax year as though you’d 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. What’s more, this is subject to the overriding limit for relief for each year. 

How do you claim your tax relief?

An investor who invests under the scheme can claim tax relief once the company they invest in sends through an Enterprise Investment Scheme claim form. The official EIS claim form for this is called an EIS3 form, and you’ll receive one of these forms for each investment. Once the investor has the HMRC EIS3 claim form, they can claim tax relief through their Self-Assessment tax return. They’ll do this in the tax year, which covers the share issue, although, as mentioned earlier, there’s the EIS tax relief carry-back feature.

Please visit the HMRC website guide for more details and information on the scheme. This contains helpful information and is a good overview of how the scheme works. 

Final thoughts

Although the Enterprise Investment Scheme (HMRC) isn’t suitable for all, it could be worth considering for some UK contractors and other individuals. As a contracting professional, you can benefit from EIS tax benefits when you invest via one of these schemes. If your savings aren’t earning a reasonable interest rate, it’s one option you could consider.

It’s important to note the EIS income tax relief is attractive. This is because you can save a fair amount of personal tax when investing in this scheme. However, this does depend on your level of earnings. Furthermore, you should review the EIS eligibility guidelines before investing.

Finally, doing detailed research before investing in any company is best. As part of this, you should look at how your potential investment in a company under this scheme fund might perform in the future. If you enjoyed reading this guide, please read our guide covering tax tips for contractors. Our UK contracting guide is another excellent read for UK contracting professionals.

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Published On: April 6th, 2024 / Categories: Self-Assessment /

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