Invest in an Enterprise Investment Scheme (EIS) to reduce CGT

simon

Simon Misiewicz

10th June 2020

What are Enterprise Investment Schemes (EIS)?

You may be interested in our main article “buy to let tax for UK landlords”. This article discusses all the different types of tax that you need to be aware of as a UK landlord.

If you wish to know the basics of Capital Gains Tax and annual CGT annual allowances be sure to read this article first.

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, which are summarised below :

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 date of issue.

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, thereby 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 Reduction

No Capital Gains Tax is payable on the disposal of shares which have increased in value since purchase so long as they are not sold earlier than the later of three years post-purchase or three years post commencement of trade, provided the EIS initial income tax relief was given and not withdrawn on those shares.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 longer period.  The opportunity for a CGT free gain can be an extremely valuable 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 is to limit the investment exposure to 38.5p in the £1 for a 45% tax payer, if the shares were to become totally worthless.

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

Download your buy to let tax guide here, written by our property accountants

Enterprise Investment Schemes and Inheritance Tax mitigation

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

Enterprise Investment Schemes Investment Process

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

The claim may lead to a rebate of income tax 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 an accountant or other professional with regard to 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 full 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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