Enterprise Investment Scheme Tax Relief

Simon Misiewicz

Expat & Property Tax Specialist

3rd March 2022

What are Enterprise Investment Schemes (EIS)?

The Enterprise Investment Scheme (“EIS”) is a Government scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies.

There are five current EIS tax reliefs available to investors in companies qualifying under the EIS

Enterprise Investment Schemes and 30% Income Tax Relief 

An individual with no more than a 30% interest in the company can reduce their income tax liability by up to 30% of the amount invested. An EIS qualifying investment must be held for no less than three years from the issue date.

There is no minimum subscription per company and the maximum in respect of which a subscriber may obtain income tax relief in any year is £1m.

Individuals may elect to treat their subscription for EIS shares up to their maximum annual allowance as if made in the previous tax year, effectively carrying income tax relief back one year.   In other words, up to £2m may be invested, of which £1m could be applied to the previous tax year.

Individuals each have an EIS allowance of £1m, so a married couple could invest up to £2m per tax year.

Income Tax Relief is limited to the amount which reduces the individual’s income tax liability for the year to nil.

 Enterprise Investment Schemes and Capital Gains Tax Reliefs

No Capital Gains Tax is payable on the disposal of shares. This is the case where the value increased since purchase. Another caveat is where the asset is not sold earlier than the latter of three years post-purchase or three years post commencement of trade. This is provided the EIS initial income tax relief was given and not withdrawn on those shares.

However, the shares can be held for much longer, thus potentially permitting CGT free gain to accrue over a more extended period. The opportunity for a CGT free gain can be a precious benefit from subscribing for shares in a successful EIS qualifying company.

Tax on capital gains realised on a different asset can be deferred for as long as the EIS qualifying shares are held or even indefinitely, where disposal of that asset was less than 36 months before the date of the issue of shares in the EIS investment or less than 12 months after it.

A deferral relief is unlimited; in other words, this relief is not limited to investments of £1m per annum and can also be claimed by investors (individuals or trustees) whose interest in the company exceeds 30%.

If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such loss can be set against the investor’s capital gains or his income in the year of disposal or the previous year.

For losses offset against income, the net effect limits the investment exposure to 38.5p in the £1 for a 45% taxpayer if the shares became worthless.

EIS the losses can be offset against Capital Gains at the prevailing rate of 28% as applicable.

Enterprise Investment Schemes and Inheritance Tax mitigation

Shares in EIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax purposes. After two years of holding such investment, the relief may be 100%. Inheritance Tax is reduced or even eliminated in respect of EIS such shares.

EIS investments are a great way to mitigate the rates of Capital Gains Tax that you pay.

Enterprise Investment Schemes Investment Process

The investor must have an EIS3 Form from the company invested in claiming relief. The investor has to fill in and submit a self-assessment income tax return. The EIS3 form must be submitted with the return if the investor claims CGT deferral relief.

The claim may lead to an income tax rebate, as we have mentioned above.

The EIS investor can write to ask HMRC to adjust their PAYE code. Their payments on accounts may be reduced if the EIS investor is self-employed. It is advisable to speak to a capital gains tax accountant or other professional concerning the tax reliefs. There is also information on the HMRC website under EIS Investing.

Capital Gains Tax (CGT) may be mitigated by EIS investments (called EIS Reinvestment Relief). This means your CGT is frozen  As long as you reinvest the total value of the gain you made (less your annual allowance).

The previous deferred CGT will be unfrozen upon the sale of the EIS shares. This depends on how much of the investment you sell. You will need to speak with an IFA about this as we are not regulated to discuss this in any more detail.

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