EIS

The Enterprise Investment Scheme (EIS) is a UK government initiative designed to encourage private investments in small, high-risk companies by offering significant tax reliefs. Launched in 1994, EIS aims to help smaller, higher-risk companies raise capital by providing various tax incentives to investors who buy shares in these businesses.

Investors in EIS-qualifying companies can benefit from several tax reliefs:

• Income Tax Relief: You can claim 30% of the investment as a reduction in your income tax liability, up to a maximum investment of £1 million per tax year, or £2 million if the additional £1 million is invested in knowledge-intensive companies.
• Capital Gains Tax (CGT) Deferral Relief: Capital gains tax on gains realised on the sale of any asset can be deferred when the gain is invested in EIS shares.
• CGT Exemption: If you hold the shares for at least three years, any gains made on the sale of the shares are free from CGT.
• Loss Relief: If the shares are disposed of at a loss, the loss can be set against your income tax liability.
• Inheritance Tax Relief: EIS shares are typically exempt from inheritance tax if held for two years and at the time of death.

To claim EIS tax relief, you must:

• Obtain an EIS3 certificate from the company you invested in.
• Complete the relevant section on your self-assessment tax return or send the EIS3 certificates directly to HMRC. Should we mention something about consulting with your tax adviser?
• If claiming carry-back relief (applying the tax relief to the previous tax year), this must be indicated on your tax return.

EIS investments carry several risks:

• High Risk of Loss: The companies involved are usually small and in the early stages of development, making them high-risk investments.
• Liquidity Risk: EIS shares are not listed on any stock exchange, which makes them harder to sell compared to publicly traded shares.
• Investment Horizon: To benefit from the tax reliefs, you must hold the shares for a minimum of three years, which may limit flexibility.
• No Dividends: Many EIS-qualifying companies do not pay dividends as they reinvest earnings to fuel growth.

If the EIS investment fails and you sell the shares at a loss, you can claim loss relief against either your income tax or capital gains tax liabilities. The relief is given at your marginal rate of tax, reducing your overall tax burden.

EIS Carry Back Relief allows you to treat all or part of the shares purchased in the current tax year as though they were acquired in the previous tax year. This allows you to claim income tax relief against the previous year’s tax bill, subject to the annual investment limit of £1 million.

• Direct Investment: Investing directly into a company that qualifies under the EIS.
• EIS Fund: Investing in a fund managed by an EIS fund manager, who will then invest in a range of EIS-qualifying companies on your behalf.

Companies must meet several criteria to qualify for EIS, including:

• They must be unlisted and not traded on a recognised stock exchange.
• They must have gross assets of less than £15 million before the investment and no more than £16 million after the investment.
• They must have fewer than 250 full-time equivalent employees at the time of investment.

You can check if a company qualifies for EIS by asking the company directly, or by checking if they have received EIS Advance Assurance from HMRC. Advance Assurance gives investors a degree of certainty that the investment will qualify for EIS tax relief.

To benefit from the full range of EIS tax reliefs, you must hold the shares for a minimum of three years from the date of issue or the commencement of trading by the company, whichever is later.