Enterprise Investment Scheme (EIS) ...
The EIS is a Government initiative designed to encourage private individuals to invest in Britain's entrepreneurial private companies, the key driver of our economy. Investors qualify for a range of attractive tax benefits to reflect the investment risks inherent in such companies.
There are five current separate types of EIS tax relief:
Income tax relief - Provided an EIS qualifying investment is held for no less than three years from the date of issue, or three years from commencement of trade, if later, an individual with no more than a 30% interest in the company can reduce their income tax liability by an amount equal to 20% of the amount invested. The minimum subscription is £500 per company and the maximum per investor is £500,000 per annum. Where an individual subscribes for qualifying shares before 6 October in a tax year, a claim may be made to carry back one half of the amount subscribed to the previous tax year, subject to a maximum of £50,000.
CGT Deferral Relief - Tax on gains realised on a different asset can be deferred indefinitely, where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it. Deferral relief is unlimited, in other words, this relief is not limited to investments of £500,000 per annum and can also be claimed by investors (individuals or trustees) whose interest in the company exceeds 30%. This can be done on a sequential or serial basis.
CGT Freedom - No Capital Gains Tax payable on disposal of shares after three years, or three years after commencement of trade, if later, provided the EIS initial income tax relief was given and not withdrawn on those shares.
Working example
Loss Relief - If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such loss can be set against the investor's capital gains or his income in the year of disposal or the previous year. For gains offset against income tax, the net effect is to limit the investment exposure to 48p in the £1 for a 40% tax payer if the shares become totally worthless. Alternatively the losses can be offset against Capital Gains Tax at the prevailing rate - 18% from tax year 2008/09.
Inheritance Tax Exemption - EIS Investments are generally exempt from Inheritance Tax after two years of holding such investment.
Although riskier than most traditional quoted investments, successful EIS companies also have the potential for strong growth and superior returns. As a consequence, an EIS is appropriate for those investors who wish to include in their portfolio some high risk companies.
The rules governing the EIS are complex and interrelated with other legislation so it is nearly alway essential to consult a professional who is experienced in this area.