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Introduction
The Enterprise Investment Scheme (EIS) is a type of Venture Capital Trust (VCT) scheme many individuals may decide to invest in. This includes limited company contractors as well as other business owners and individuals. When they invest in EIS, HMRC allows individuals to claim 30% income tax relief against their overall income tax bill. In this article we will investigate what is EIS tax relief and how this works. Besides the EIS income tax relief, we will also look into EIS eligibility and the EIS tax benefits.
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 ris
VCT schemes in general
In general, Venture Capital Trust schemes (VCT), of which EIS is one, offer tax relief to UK individuals (not companies). These schemes encourage individuals to invest in companies and social enterprises, and in return, they receive Enterprise Investment Scheme 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
As a limited company contractor or individual, under VCT schemes, you can personally invest directly in a company or enterprise that qualifies for one of these schemes. The companies that offer EIS 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 and EIS eligibility. Please note the investments into a VCT scheme are on a personal basis, rather than through your UK contractor limited company or other business.
When investing in an EIS qualifying company, you will also need to ensure that you meet the conditions for investors. In addition, the company or enterprise will need to meet the EIS general 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.
HMRC 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 is 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 besides receiving EIS income tax relief, there is also 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
There are several EIS benefits, the main one of which is tax relief 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.
What is more, the allowances and EIS income 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. Under EIS eligibility rules, If such individuals invest in the company offering the investment, they are not entitled to Income Tax Relief on their shares. Therefore, to qualify for the benefits that the scheme provides, you must be an EIS qualifying investor.
The scheme can be a great way to invest funds and there are several EIS tax benefits. 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 EIS 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 and another one of the EIS tax benefits.
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 relief 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 EIS tax relief
An investor who invests in the HMRC Enterprise Investment Scheme can claim relief once the company sends through an Enterprise Investment Scheme claim form. The official form for this is an EIS3 form. Once the investor receives this, they can make their claim for EIS relief (HMRC) 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 (HMRC) is not suitable for all, it could be worth considering for some UK contractors and other individuals. When you invest via one of these schemes, you can benefit from EIS tax benefits. 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 income 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. You will also need to review the EIS eligibility guidelines before investing.
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
