Enterprise Investment Scheme (EIS) Guide
Individuals can claim tax reliefs under the EIS if they subscribe in cash for ordinary shares in unquoted qualifying trading companies and certain conditions are met for at least three years. These tax incentives are given by the Government to encourage investment in small and medium-sized trading companies (as defined in the legislation) which are perceived to carry a higher degree of risk.
The Tax Reliefs
In order to encourage investment in EIS companies, the government offers quite generous tax reliefs. These are:
| Income Tax Relief | An investor who subscribes in cash for ordinary shares in an EIS qualifying company can obtain income tax relief of up to 20% on investments of up to £500,000 each year. This relief can be claimed either in the tax year the investment is made, or in the previous year. |
| CGT Deferral Relief | Investors with capital gains made up to three years before or one year after an EIS investment is made can claim ‘deferral relief’ against those gains thereby increasing the effective rate of tax relief to up to 60%.Deferred gains do become taxable again on certain events, such as a sale of the EIS shares. Deferral relief is particularly valuable where the investor has gains chargeable in years before 2008/09 at CGT rates of up to 40%, as, when the gains crystalise the new rate of 18% will be charged. The £500,000 annual limit does not apply for CGT deferral relief purposes - any amount can be deferred. |
| Exemption from Capital Gains Tax | If an investor holds EIS shares for at least three years, any capital gain realised on the disposal of the shares will be both income tax and capital gains tax free, provided income tax relief has been given and has not been withdrawn. |
| Loss relief | If a loss is made on disposal of the EIS shares at any time, that loss may be offset against either current or future capital gains or, by election, against income in the current or previous year. |
| Inheritance Tax Exemption | Provided a shareholder has owned shares in a qualifying unquoted trading company for at least two years and certain conditions are met at the time of transfer, inheritance tax business property relief of 100% is available, which reduces the inheritance tax liability on the transfer to nil. As with deferral relief there is no limit on the amount you can invest in EIS Companies for Inheritance Tax relief purposes. |
For further information or specific advice on the above please contact Craig Hughes on 0115 983 5595 or 07717 840596 or email chughes@edftax.co.uk.
