The EIS (Enterprise Investment Scheme) was set up by the UK government in 1993 to assist small businesses in raising finance. It’s a great funding option for startups, as well as an attractive investment option for those looking to make more tax-efficient investments.
Here are some of the main benefits and tax reliefs available to investors under EIS:
Up to a cap of £1m per year, you can claim 30% income tax relief – meaning you could potentially save £300,000. The EIS allowance is allocated on an individual basis. This means that a married couple or two civil partners could invest up to £2m per year, and gain tax relief worth up to £600,000.
Capital Gains Tax (CGT)
If you hold the shares for three years or more and claim the income tax relief, then you can receive an exemption on the profits you earn from the shares.
If you hold the shares for a minimum of two years, then under the EIS these shares receive an exemption from inheritance tax (IHT).
CGT tax deferral relief
You can defer your payment of CGT by investing the capital gain in an EIS-qualifying company.
If you invest in an EIS company which then fails, and shares are disposed of at a loss, then you can set the loss amount against your income tax bill or capital gains tax bill.
To qualify for loss relief, the value of your investment must have fallen below “effective cost”. This refers to the amount you invested in the EIS company after you have subtracted any previously claimed income tax relief.
For example, if you invested £10,000 in an EIS company and claimed income tax relief of £3,000, then the effective cost in this instance would be £7,000.
Loss relief for EIS investments can be claimed either against your income tax bill or capital gains tax bill. It’s worth noting that in most cases, it is best to offset against your income tax bill since income tax rates are higher than CGT rates.
Who can invest in EIS investments
Broadly speaking, any British citizen can invest in EIS-qualified companies. However, it is important to be aware of certain restrictions that may affect your ability to invest:
You cannot receive income tax relief under EIS if you are connected to the company you want to invest in, either via employment or through “financial interest”.
Employment “connections” therefore exclude employees, directors and partners from investing in their own EIS company. “Financial interest” excludes those who own more than 30% of the EIS company shares or voting rights, and applies to your relatives as well (except siblings).
#2 Tax relief claims
The EIS company must send an EIS3 form prior to an investor being able to claim income tax / CGT relief. Once this has been done, you can claim through your tax return via Self-Assessment.
#3 Reductions & withdrawals
It is important to bear in mind that your EIS tax relief can be taken away or reduced if the company loses its EIS status, or if you become connected to the company.
#4 EIS Investing via Bure Valley Group
There are many great reasons to invest in EIS companies via Bure Valley Group:
- Joining our investment network is completely free.
- All of the EIS benefits and tax reliefs are kept by you.
- We provide a wide range of investment opportunities from many industries and sectors, allowing you to spread your investment risk by diversifying your portfolio.
Which Companies can qualify for EIS?
For a company to qualify for EIS status, it must at least meet the following criteria:
- The business must be unquoted on any recognised stock exchange.
- It must have a fixed place of business inside the UK.
- Gross assets must be valued at under £15m, prior to the EIS issue.
- There must be no more than 250 full-time employees.
- The company cannot be controlled by another one.
- The money raised through EIS must be used within 2 years
- Companies can only raise £5m in total from EIS within a 12 month period.
- It must engage in a “qualifying trade”, such as forestry or property development.
- Share must be issued within seven years of the company’s first commercial sale. In certain situations, this time limit can be extended.
What EIS Companies can use the Money for
Suppose your investment is accepted into an EIS company, what are they allowed to spend that money on? Broadly speaking, they must use in on a business activity under a qualifying trade, or to prepare carrying out such a trade. It can also be used on research and development.
However, there are important restrictions on EIS companies in their use of the funds. For instance, they must use the money to grow or develop the company. They cannot use it to buy parts of another business or a whole other company.