What is EIS?
The Enterprise Investment Scheme (“EIS”) is a UK government scheme designed to encourage and reward investment into smaller, higher risk companies often in their earlier stages. EIS offers a range of tax reliefs to investors. To receive EIS relief, both the company and the investor must be eligible and the shares must be held for three years to receive the full relief.
What is the tax relief?
There are four main tax reliefs available under EIS:
- Income tax relief. Income tax relief of 30% can be claimed on investments (up to a maximum investment value of £1million in one tax year).
- Capital gains tax exemption. Any gain on the sale of the EIS eligible shares will not be subject to capital gains tax provided the shares have been held for a minimum of three year.
- Loss relief. If the EIS eligible shares are sold at a loss, the investor can set the loss against the income of the year in which the shares were disposed of.
- Capital gains tax deferral relief. If the investor has realised a taxable gain (e.g., by selling property) and uses this gain to invest in an EIS qualifying investment, they are able to defer the capital gain liability for as long as the money remains invested and the shares are EIS eligible.
To claim EIS relief, both the company and the investor must be eligible. The restrictions on the company include (but are not limited to) that the funds must be used to buy new shares (not existing shares), the company cannot be trading for more than seven years, the company must be permanently established in the UK with fewer than 250 employees and the company’s gross assets must not exceed £15 million before the investment (and £16 million after the investment). More details on the eligibility criteria can be found here.
Investors must hold their shares for a minimum of three years to benefit from the income tax relief and the capital gains tax exemption. An investor must not be connected with the company (e.g., they cannot be an employee or director). They also cannot hold more than 30% of the issued capital of the company and must not already own shares in the company subject to limited exceptions such as already holding EIS shares or founder shares.
EIS advance assurance
If companies and/or investors want comfort that an investment will be eligible for EIS relief, Advance Assurance can be sought from HMRC. An application will be made by the company to HMRC setting out details of the company and the investment and, if successful, the company will receive a letter from HMRC stating that the company’s proposed share issue would qualify for EIS relief based on the information given. It should be noted that Advance Assurance does not guarantee that the investment will qualify for EIS relief, but it does offer a degree of comfort.
Please see the government website here for more information on EIS.