Through the Enterprise Investment Scheme (EIS) eligible investors can claim up to 30% income tax relief on investments up to £1 million per tax year.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are UK government schemes designed to help smaller higher-risk trading companies raise finance, by offering a range of tax relief to investors who purchase new shares in those companies. Where a business is listed as 'EIS' or 'SEIS' on GoViddo, this tax relief will be available to qualifying investors.
You can claim up to 30% income tax relief on investments up to £1 million per tax year.
Any gain is Capital Gains Tax (CGT) free if the shares are held for at least three years.
Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company.
If the shares are disposed of at a loss you can elect that the amount of loss be set against any income tax of that year or of the previous year. Tax reliefs available:
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; therefore a married couple could invest up to £2 million each tax year and be eligible for Income tax relief. The shares must be held for at least three years from the date of issue or the tax relief will be withdrawn.
People connected with the company are not eligible for Income Tax Relief on their shares.
Any gain is CGT free if the shares are held for at least three years and the income tax relief was claimed on them. Shares can be held for much longer and therefore potentially enable the investor to be accrue their CGT exemption over a long period of time which can be a great attraction.
If shares are disposed of at a loss, the investor can elect that the amount of the loss, less Income Tax relief given, can be set against income of the year in which they were disposed or, on income of the previous year instead of being set of against any capital gains.
Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company. The gain can be made from the disposal of any kind of asset but the Investment must be made one year before or three years after the gain arose - connection to company does not matter. Unconnected investors are eligible for relief from both Income tax and CGT referral relief.
There is a 'carry back' facility which allows the all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year. Relief is then given against the Income Tax liability of that preceding year rather than against the tax year in which those shares were acquired. This is subject to the overriding limit for relief for each year.
Should the investor be connected to the company, they are not eligible for Income Tax Relief. Connections are defined through financial interest or employment.
An individual is connected with the company if they control the company or hold more than 30% of the share capital or voting rights. These conditions apply for up to 2 years before and 3 years after the share issue. If during this time, the individual becomes connected, then the relief will be withdrawn. All relatives except brothers and sisters are included within these restrictions.
Partners, directors and employees of the company are all connected with it and therefore not eligible, as are associates. Associates are business partners, trustees and relatives. Again, these conditions apply for up to 2 years before and 3 years after the share issue.
The only exceptions are Business Angels – where the connection is as a director who receives no remuneration from the company.
The investor can only claim relief once the company sends through an EIS3 form. Claims are made through the Self-Assessment tax return for the tax year in which the shares were issued.
Claims can be made up to five years after the investment after the first 31 January following tax year in which investment was made.
Tax relief will be withdrawn if you become connected to the company or if the company loses its qualifying status.
The relief will be either reduced or withdrawn if the Shares are disposed of or if the investor receives “value” from the company such as a loan or an asset below market value.
Here’s a few examples of how EIS tax relief works. To make the maths easy, let’s assume you invest £10,000 in each case and you’re in the 45% tax bracket.
The film does well and doubles its value and you hold the shares for three years
Investment = £10,000
Return = £20,000
Income Tax relief = £3,000 (as a reduction in your income tax bill)
Capital Gains Tax = £Zero
Total Return = £23,000
The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment.
Please visit the HMRC website for further information on EIS tax relief.