Recent figures reveal that record funding has been raised through the Enterprise Investment Scheme (EIS). But what is EIS and should you build it into your own investment portfolio? Peter Webb, our Head of Tax Advisory, takes a look from a tax perspective.
The Enterprise Investment Scheme (EIS) was introduced in 1994 and provides tax relief if you buy and subscribe for new shares in a qualifying company. This allows EIS companies to raise up to £5m each year to grow their business. A limit of £12m can be raised through the Scheme over a company’s lifetime. EIS has certainly grown in appeal, and HMRC recently confirmed that in 2021/2022 around £2.3bn was raised by just under 4,500 companies.
Companies that are becoming household names such as Bloom and Wild, Pasta Evangelists and Gousto have grown their businesses using EIS funding. There are of course various rules that the company seeking EIS funding must comply with. But what are the rules and benefits for an individual investing in a company using the Scheme?
Income Tax relief
Income Tax relief at 30% is given if you buy and subscribe for shares in a qualifying EIS company. Generally, investors with connections to the company may be restricted from subscribing for EIS shares. The rules can be complex and if you have these connections (for example you’re an employee or director) expert advice is needed. However, you can subscribe for shares and later become a paid director without affecting your entitlement to tax relief. You can be non-UK tax resident and invest in EIS shares too, but do bear in mind the reliefs all relate to UK tax.
Generally, the maximum amount of investment on which Income Tax relief can be claimed is £1m in each tax year. That limit is increased to £2m if you invest more than £1m in knowledge intensive companies.
Income Tax relief is given in the tax year that the shares are subscribed for. But you can carry back the relief into the previous tax year. The relief can reduce your Income Tax bill but only up to the amount of Income Tax you have actually paid – you can’t get a payback!
Capital Gains Tax relief
Capital Gains Tax deferral relief is also available. This applies where any chargeable gains are reinvested by subscribing for ordinary shares in qualifying EIS companies. Capital Gains Tax (CGT) on the reinvested gains is deferred until the new shares are sold or disposed of.
You can also use CGT relief when the EIS shares are sold at a profit, as long as they have been held for at least (broadly) three years and Income Tax relief was claimed on subscription of the shares. A word of warning – be careful if you have deferred capital gains on your original investment – those gains will become chargeable when you sell or dispose of your EIS shares.
Inheritance Tax relief
EIS shares generally qualify for Inheritance Tax Business Property Relief too. This area can be complex but usually the shares can be left to your beneficiaries free from a possible 40% Inheritance Tax charge, as long as they have been held for at least two years at the time of your death.
What happens if your EIS shares make a loss?
If the value of your EIS shares falls to nothing or the shares are sold for less than you paid for them, loss relief is available. This allows you to offset the loss against either your CGT bill or Income Tax bill, whichever gives you the most benefit. Helpfully you can offset the loss against your Income Tax bill for the current tax year and/or the previous tax year.
When looking at your options it may be better to offset any loss against your CGT bill for the current tax year. The loss is deducted from any gains before CGT is calculated. If the loss exceeds the capital gains for the current year, any excess is carried forward to set against future gains.
Originally the government intended to end the Enterprise Investment Scheme in 2025 but have now confirmed that it will be made available beyond this. With so many tax reliefs available the Scheme does offer a strong tax incentive to invest in startup and smaller trading companies. As a result, it’s no surprise to see records being set on EIS investment levels. And for many investors the extension of the Scheme is certainly very welcome.
To discuss any aspect of your tax planning, or investment strategy, please contact your nearest office.
