The Enterprise Investment Scheme (EIS)
Overview
The Enterprise Investment Scheme (EIS) enables eligible investors to claim up to 30% income tax relief on investments up to £1 million per tax year. The Enterprise Investment Scheme (EIS) is a longstanding UK government scheme that supports smaller, higher-risk trading companies to raise finance. The scheme offers a range of tax reliefs to investors who purchase new shares in those companies.
The benefits of EIS tax relief
- Income Tax Relief There is no minimum investment through EIS in any one company in any one tax year. Tax relief of 30% can be claimed on investments (up to £1,000,000 in one tax year) giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it. EIS allowances are allocated individually. For example, a married couple could separately invest up to £2 million each tax year and be eligible for Income Tax relief.
- Capital Gains Tax disposal relief Any capital gain is CGT free if the shares are held for at least three years and the income tax relief on the shares was claimed. Shares can be held for much longer and potentially allow you to accrue a CGT exemption over a long period of time.
- Loss relief If shares are disposed of at a loss, the investor can elect that the amount of the loss – less Income Tax relief – can be set against income of that year or the previous year. This avoids a situation where the loss is set against capital gains, allowing far more flexibility.
- Capital Gains Tax reinvestment relief Payment of CGT can be deferred if the gain is reinvested into shares of an EIS-qualifying company. The investment must be made one year before or three years after the gain arose, whether or not the investor has a connection to the company (see “Who can claim EIS relief” for more on what “connected” means). Unconnected investors are eligible for relief from both Income tax and CGT deferral relief.
Examples of EIS relief in action with a £20,000 investment
Below are two examples of how EIS works. To make the maths easy, let’s assume you invest £20,000 in each case and you’re in the 45% tax bracket.
Case 1:
The company does well and doubles its value and you hold the shares for three years
Investment = £20,000
Income Tax relief = £6,000 (as a reduction in your income tax bill)
Share sales = £40,000
Your gain = £26,000 (£20,000 profit from the sale plus £6,000 income tax relief)
Case 2:
The company value stays the same
Investment = £20,000
Income Tax relief = £6,000 (as a reduction in your income tax bill)
Capital Gains Tax = £Zero
Your gain = £6,000 (from the income tax relief)
Case 3:
The company closes and your shares are worth nothing
Investment = £20,000
At risk capital = £14,000
Loss relief on at risk capital @ 45% = £6,300
Your actual loss = £7,700 (£20,000 – [£6,000 + £6,300])
Examples of EIS relief in action with a £50,000 investment
Below are two examples of how EIS works. To make the maths easy, let’s assume you invest £20,000 in each case and you’re in the 45% tax bracket.
Case 1:
The company does well and doubles its value and you hold the shares for three years
Investment = £50,000
Income Tax relief = £15,000 (as a reduction in your income tax bill)
Share sales = £100,000
Your gain = £65,000 (£50,000 profit from the sale plus £15,000 income tax relief)
Case 2:
The company value stays the same
Investment = £50,000
Income Tax relief = £15,000 (as a reduction in your income tax bill)
Capital Gains Tax = £Zero
Your gain = £15,000 (from the income tax relief)
Case 3:
The company closes and your shares are worth nothing
Investment = £50,000
Income Tax relief = £15,000 (as a reduction in your income tax bill)
At risk capital = £35,000
Loss relief on at risk capital @ 45% = £15,750
Your actual loss = £19,250 (£50,000 – [£15,000 + £15,750])