Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) is a series of UK tax reliefs launched in 1994 in succession to the Business Expansion Scheme.[1] It is designed to encourage investments in small unquoted companies carrying on a qualifying trade in the United Kingdom.
Contents
Purpose
Investment in companies that are not listed on a stock exchange often carries a high risk. The tax relief is intended to offer some compensation for that risk. The EIS offers both income tax and capital gains tax reliefs to investors who subscribe for shares in qualifying companies. On 6 April 2012, the Seed Enterprise Investment Scheme (SEIS) was launched, with the goal to "stimulate entrepreneurship and kick start the economy."[2]
EIS Tax Benefits
- 30% upfront Income Tax relief up to maximum investment of £1 million, which can be carried back to the previous tax year
- 100% Inheritance Tax relief (provided the investments have been held for at least 2 years at time of death)
- Capital gains tax deferral for the life of the investment
- Tax-free growth
- Tax relief from investment losses[3]
Provisions
- An individual with no more than a 30% interest in the company can reduce his income tax liability by an amount equal to 30% of his share subscription. The maximum subscription per investor is currently £1,000,000 per annum, yielding a potential reduction in tax liability of £300,000 per annum (assuming the investor has sufficient income tax liability).[4][5]
- Deferral of gains realised on a different asset, where disposal of that asset was less than 12 months before the EIS investment or less than 36 months after it. (Deferral relief). This relief is limited to the amount being invested into the EIS and can be claimed by investors whose interest in the company exceeds 30%. It is available to individuals and trustees. Where gains arise on the EIS investment, taper relief is available. Note that deferral of gains is no longer available by investing in VCTs.
- No capital gains tax payable on disposal of shares after three years (after five years for investments made before 6 April 2000) provided the EIS initial income tax relief was given and not withdrawn on those shares.[5]
- If EIS shares are disposed of at any time at a loss, such loss can be set against the investor's capital gains or his income in the year of disposal.
EIS Investments are exempt from inheritance tax after two years of holding such investment.,[citation needed] subject to the Company being allowable under Business Property Relief ("BPR").[6]
Qualifying companies and individuals
The rules for qualifying are complicated; for example, the following are some of the qualifications that must be met:[5]
The company
- The company must not have assets greater than £15 million
- The company may have no more than 250 full-time equivalent employees
- All capital employed must be actively engaged in the company within 24 months
- The company must not be in specific industries
- Entry into the scheme is subject to a decision and audit made by an appointed tax officer
- The company must not be listed or have any intention of becoming listed at the time of the investment
The individual
- The investor may not have more than a 30% interest in the company
- No partner or associate of the investor (including spouse, relations, prior business contacts) may have other interests in the company
- The investor must not have any form of preferential shares
- The investor must not have any other form of controlling interest in the company
- This scheme must not be used for the purposes of evading tax
References
- ↑ http://content.alliotts.com/cms/filelibrary/Enterprise_investment_scheme_and_venture_capital_trusts.pdf
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- ↑ 5.0 5.1 5.2 HMRC
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