The Enterprise Investment Scheme (EIS) is a government initiative which encourages innovation by granting private investors a significant tax break when investing in early stage, ‘growth-focused’ companies.
- Do I qualify to invest in an EIS company?
1.1 You must have taxable UK income and hold the shares for at least three years
You don’t need to be a UK resident to claim EIS, but you must have UK income tax liability against which to set the relief. The shares must be held for a period of at least three years from the date of issue for the relief to be retained. If they are disposed of within that three year period, or if any of the qualifying conditions cease to be met before the termination date for the shares (3 years from the date of the share issue), relief may be withdrawn or reduced.
1.2 You cannot be an employee of the EIS company – but you can be its paid director (or even unpaid director)
You and any ‘associates’ must not be an employee of the company as from the date of issue of the shares and up to the third anniversary of the date of the share issue. An ‘associate’ includes business partners, trustees, and relatives (spouses, civil partners, parents, children, etc.). Brothers and sisters are not considered as associates for SEIS purposes.
You can be an unpaid director and receive EIS shares at any time. However, you can only be a paid director after you receive your shares.
1.3 You cannot have any substantial interest in the company
You must not have any ‘substantial interest’ in the issuing company at any time from incorporation of the company until the third anniversary of the date of the share issue. A ‘substantial interest’ is defined as you directly or indirectly possessing, or having an entitlement to acquire more than a 30% stake in the company. Shareholdings of associates are taken into account in arriving at the 30% figure.
1.4 No related investment arrangements
You will not qualify for EIS relief if you have subscribed for the shares as part of a reciprocal arrangement which involves somebody else subscribing for shares in a company in which you have a substantial interest in return for the investor subscribing in a company in which the other person has a substantial interest.
1.5 You cannot exceed the limit on relief
You may invest up to £1,000,000 under EIS in qualifying companies.
- You must be a UK taxpayer.
- You must not be connected to the EIS company (the meaning of connected being: (i) an employee (ii) partner (iii) a paid director (iv) hold more than 30% of share capital, voting rights etc)
- You must be buying brand new shares that are not already on the market.
2. EIS Tax Relief Benefits for Investors?
When you invest into an EIS eligible company, you can receive tax benefits in the following ways:
EIS Income Tax Relief:
You can claim back up to 30% of the value of your investment in the form of income tax relief. Therefore, if you make an investment of £10,000 you can save £3,000 in income tax.
EIS Capital Gains Tax (CGT) Relief:
If you hold the shares for at least 3 years, then all gains that accrue on those shares may be exempt from CGT when you come to sell them. Therefore, if you buy your shares for £10,000 and in 3 years they are worth £30,000, you will not have to pay capital gains tax on the £20,000 gain if you decide to sell your shares.
You will not have to pay CGT until a later date if you dispose of an asset (any asset) and use the gain you made on that asset to invest in shares in a company that qualifies for EIS. You will usually have to pay the CGT when you dispose of the EIS shares but can roll into a further EIS company.
EIS Loss Relief:
- If the business performs poorly and you lose money on your investment, you may claim loss relief.
- The loss relief you can claim is at the equivalent rate to the highest rate of income tax you pay. So if you pay income tax at a rate of 40%, you can claim to 40% of your net loss in income tax relief.
- For example, if you make a £10,000 investment and the business fails meaning your investment is no longer worth anything you could claim loss relief. Firstly you could claim the 30% income tax relief (£3,000 in this example). You can then claim loss relief on the remaining £7,000 of an amount equal to your income tax bracket – in this scenario 40% or £2,800, meaning your total loss is only £4,200
Applying tax relief to a previous year (carry-back):
You can treat some or all of the shares as being issued in the preceding tax year, as long as you had not reached the limit for the value of EIS shares purchased (£1,000,000) in that year.
If, for example, you invest £10,000 in an EIS eligible company in the 2020-21 tax year, your income tax relief would be £3,000 (30% of £10,000). You can apply to have that £3,000 carried back to the previous tax year (2019-2020) and relieved against your tax in that year, as long as you had not acquired more than £1,000,000 worth of EIS shares in that year.
EIS Inheritance Tax Relief:
You can generally claim Inheritance Tax relief of 100% after two years of holding the EIS shares. This means that any liability for Inheritance Tax is reduced or eliminated in respect of such shares. However, this relief is not available if the shares are listed on a recognised stock exchange.
- Withdrawal or reduction of the relief
Tax relief under EIS may be either withdrawn or reduced if:
- at any time during the three years from the date of issue of the shares, you dispose any of the shares (a disposal to a spouse or civil partner does not count towards a disposal);
- you receive ‘value’ from the company or from a person connected with that company at any time from the incorporation of the company to the third anniversary of the date of the share issue. The circumstances during which an investor is deemed to have received value from the company include situations where the company repays, redeems or repurchases any of its share capital belonging to the individual, the company repays a debt owed to the individual, the company provides a benefit or facility for the individual, etc.
- there is a put option or call option over the shares at any time before the third anniversary from the date of the issue of the shares.
Finally, it is important to note that apart from the above requirements relating to you as an investor, you will not be able to claim any EIS tax relief if the company ceases to meet the qualifying conditions and/or fails to spend the money raised by the share issue as required.
SRC-Time are one of the South East’s leading accountancy firms in advising businesses in all aspects of their accounting and tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org or speak with an account manager to get any process started.