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Enterprise Investment Scheme
What is the Enterprise Investment Scheme (EIS) and how may it benefit the investor?
The EIS is a UK Government initiative designed to help high risk unquoted companies to raise capital by offering a tax incentive to investors.
An unquoted company is a company not listed on a recognized stock exchange and this would include companies on the Alternative Investment Market (AIM).
The tax advantages that you may be entitled to by investing in eligible shares in qualifying companies for EIS purposes are:
- Income Tax relief
- Capital Gains Tax exemption
- Capital Gains Tax Deferral relief
- Loss relief
- Inheritance Tax (Business Relief)
You may be entitled to Income tax relief on the amount you invest up to £500,000 in any one tax year.
Income tax relief at 30% of the amount actually invested in EIS shares may be set against any Income Tax liability that is due whether lower, basic or higher rate. Relief is limited to the amount that reduces the liability to nil.
Investors must not be connected with the companies in which they invest although an unconnected person who invests in a company and then becomes a paid director may still be eligible for relief. Connected investors may still qualify for deferral relief.
Relief will be withdrawn if any conditions relative to the shares or the company are not satisfied or if an event occurs causing the investor not to be eligible.
Relief may be wholly or partly withdrawn if the shares are disposed of within three years after being issued, or if the investor receives value from the company within one year before, and three years after the issue date. Also in certain circumstances where other members of the company receive value within one year before, and three years after the issue date.
Investors may elect to carry back all or part of their EIS investment to the tax year prior to the tax year in which the shares were issued (limited only by the £500,000 limit) provided there is sufficient liability to offset. This means that relief could be claimed on up to £1m (£500,000 being carried back and £500,000 remaining in the current year). This carrying-back has no bearing on the ‘relevant periods’ which apply to those shares. Furthermore, provided no income tax relief has been withdrawn, a gain which arises after at least three years on the disposal of any of the shares will be exempt from Capital Gains tax where the investment limit has not been exceeded (£500,000 for 2011/12). This CGT exemption may be postponed (CGT deferral relief) until a later tax year. A further benefit is the provision of loss relief. If shares are disposed at a loss relief may be claimed as a deduction from your taxable income or set against chargeable gains in the normal way. Where there is insufficient income or gains the loss, or any unused part, can be carried forward to set against chargeable gains in future years.
Holdings of EIS shares may be exempt from Inheritance Tax (IHT) by qualifying for business relief after a minimum holding period of two years.