The Enterprise Investment Scheme (“EIS”) was established by the Finance Act 1994 as a Government initiative to encourage investors to put money into shares in unquoted small or medium sized companies, and to assist such companies in fund raising so that they could start trading. The EIS rules are contained in the Income Tax Act 2007.
The EIS offers significant tax benefits to “qualifying investors” who have subscribed for “relevant shares” in a “qualifying company”. The money invested must be applied by the EIS company within a specified time limit for the purposes of a “qualifying business activity”. All of these terms are explained below.
Generally, conditions must be met from the share issue for three years but some conditions need to be met from incorporation of the company. Whilst this note seeks to highlight the times during which they need to be met in respect of certain conditions, we have for brevity not done so for all conditions. Care should be taken to ensure that all conditions are met for the relevant period and the position monitored closely by the issuing company for all conditions.
Tax benefits available
Both income and capital reliefs are available, as follows:
- Income tax relief of 30% of the cost of the share subscription up to a maximum investment of £2,000,000 per annum (any investment above £1,000,000 per annum must be in a knowledge-intensive company (see below)) given as a reduction in income tax liability for the tax year in which the investment was made; the relief will be clawed back unless the relevant shares are held for at least three years from the later of their date of issue or, in certain circumstances, commencement of trade (“relevant period”).
- Capital gains tax exemption on disposal of shares for which income tax relief is given and not withdrawn, provided that the shares have been held for the relevant period (if a disposal results in a loss, the loss is available regardless of when the shares are sold).
- Capital gains deferral relief (no maximum limit) which allows deferral of all or part of a chargeable gain arising on the disposal of any asset if reinvested into shares in an EIS company within one year before or three years after the disposal of the asset. Gains reinvested into EIS shares are not subject to exemption on subsequent disposal although gains reinvested on or after 3 December 2014 will be eligible for entrepreneurs’ relief when the deferred gain comes back into charge.
- Loss relief is given for any allowable losses arising on disposal of the shares (less any income tax relief already claimed) against either income or capital gains. This means that for an additional rate income taxpayer the total exposure on an EIS-qualifying investment may only be 38.5%.
If you want to find out more about EIS and whether you qualify look for the full guidance note in Solutions.