What Is The EIS?
The Enterprise Investment Scheme (EIS) is a Government approved incentive scheme. The objective of the Eis and Seis schemes is to grant generous tax relief to investors in small companies that meet the criteria to qualify as participants in the scheme. It is designed to encourage investments in small unquoted companies carrying on a qualifying trade in the United Kingdom thereby promoting growth in the economy and a source of capital for small developing companies at a time when conventional sources of finance are difficult to obtain
To qualify a company must not be listed on an exchange presumably as those companies already have access to capital from investors. Inevitably an investment in a small unquoted company carries a certain amount of higher risk as compared to a quoted company (ie a company listed on an exchange.) Investments in companies that are not listed on a stock exchange often carry a high risk. The tax relief is intended to offer some compensation for that risk. The EIS offers both income tax and capital gains tax reliefs to investors who subscribe for shares in qualifying companies. The immediate tax relief available can reduce the effective cost of the investment by up to 50%. As any gains are free of liability to income tax or capital gains (subject to qualifying rules ie shares held for a minimum period of 3 years) the
The Tax Benefits Of the EIS
- 30% Income tax relief on EIS investments. This works in practice by deducting an amount equal to 30% of your investment from your tax bill as calculated on your annual assessment. This can be carried back to the previous tax year.
- 100% Inheritance Tax relief (provided the investments have been held for at least 2 years at time of death)
- There is no Income Tax or Capital Gains tax due on gains as long as the shares are held for at least 3 years. If the shares are sold within 3 years not only are the gains liable to Capital Gains Tax but the Relief from Income tax at the time of your original investment is forfeited
- Capital gains tax deferral for the life of the investment
- Tax-free growth
- Tax relief from investment losses can be deducted from either Income Tax or Capital Gains Tax Liability
How Popular Is The EIS?
- Since the Enterprise Investment Scheme (EIS) was launched in 1993-94, almost 22,900 individual companieshave received investment through the scheme and over £12.2 billion of funds have been raised.
- Provisional data for 2013-14 shows that 2,710 companiesraised a total of £1,457 million of funds under the EIS scheme.
- In 2012-13, 2,465 companies raised £1,032 millionof funds.
- Average 340% returnon EIS shares.
Example EIS Tax Savings
Example 1: The company you invest in matches the 340% average growth in 3 years
Year 1, you invest £20,000
You receive £6,000 in Income Tax Relief
Year 3, you have held on to the shares for the minimum of three years. The company has grown and the shares are worth 340% more than what you paid.
You sell them for £68,000 and you owe zero capital gains tax on your profit.
Your total gain is £54,000
(£48,000 from the sale plus £6,000 from the income tax relief)
Example 2: The company shows zero growth
Year 1, you invest £25,000
You receive £7,500 in Income Tax Relief
Year 2, you sell your shares for the £25,000 price you paid
Total gain to you is £7,500
Example 3: The company fails
Year 1, you invest £10,000
You receive £3,000 in Income Tax Relief
Year 2, the company fails and your shares are worth £0
You receive loss relief from the government equal to your at risk capital (in this case the £10,000 invested minus the £3,000 received in Income Tax Relief), multiplied by the percentage tax bracket you belong to.
Example 3A, your tax bracket is 45%. The loss relief you receive will then be £7,000 x 45% = £3,150.
This means that for the £10,000 invested your real loss is £10,000 – £3,000 – £3,150 = £3,850
Example 3B, your tax bracket is 40%. The loss relief you receive will then be £7,000 x 40% = £2,800.
This means that for the £10,000 invested your real loss is £10,000 – £3,000 – £2,800 = £4,200
Example 3C, your tax bracket is 20%. The loss relief you receive will then be £7,000 x 20% = £1,400.
This means that for the £10,000 invested your real loss is £10,000 – £3,000 – £1,400 = £5,600
How Do I Claim EIS Tax Relief?
The important point is that an investor cannot make a claim for EIS relief until he has received a form EIS3 (Enterprise Investment Scheme Certificate and claim to relief).
The process for obtaining an EIS3 form is that the investor asks the company to issue a certificate in respect of shares that have been issued to the investor. The company will then send a form EIS1 to HMRC. If the Inspector is satisfied that the issuing company has met all the requirements insofar as they could for the time being, he will authorise the company to send a form EIS3 to the investor. The company cannot submit the form EIS1 until the company has been trading for at least four months, but it must be submitted by the later of two years after the end of the year of assessment in which the shares were issued, and two years after the end of the period of four months referred to.
The form EIS3 shows the investor’s name and address, details of the shares issued and importantly the date when the three year qualifying period for that holding of shares ends.
Note that the receipt of the EIS3 form does not affect the timing of the EIS relief – this is governed by the date when the shares are issued to the investor.