Enterprise Investment Scheme

EIS

What is it?

An Enterprise Investment Scheme (EIS) is a highly tax efficient proposition that is intended to encourage equity investment in small to medium sized UK unquoted companies.  The unquoted companies must be ‘qualifying’ companies in that they do not partake in trades associated with land, property development, financial investments, farming and forestry.

They are one of the most tax efficient investment products available to UK investors. They are particularly suited to those investors who are looking to defer capital gains.

The main advantage with EIS structures and the reason they have proved so popular to investors is that not only are all capital gains tax free but investors also receive 20% income tax relief on amounts invested, provided that the shares are retained for three years. This means that if you invest £10,000, the Inland Revenue will reduce your income tax bill by £2,000. 

Who is it for?

Enterprise Investment Schemes are aimed at investors who may have large income and capital gains tax liabilities who wish to invest for the medium to long term and are prepared to take some investment risk.

How does it work?

The EIS scheme is intended to provide tax incentives to encourage investment in qualifying unquoted trading companies.  The company’s gross assets must not exceed £7 million before investment.

Individual access to these companies will often be through a portfolio or pooled investment run by a Manager.  The objective is generally to achieve capital growth over the medium to long term whilst also creating tax efficiency.

Tax situation

EISs take advantage of some of the major tax incentives introduced by the Chancellor for investors in private companies. These tax benefits have the effect of greatly increasing the return and reducing the risk of your investment.

NB...you should remember that taxation levels, bases and reliefs could change in the future.

The tax incentives include the following:

• Income tax relief at 20% on investments up to £500,000 per tax year.(2008/9)  The investor thus needs an income tax liability to be able to use this relief.  This relief is lost if there is a disposal of the EIS investment within three years
• 100% deferral of Capital Gains Tax whereby an individual who has realised a gain may defer the gain.  A four year time period exists for CGT deferral meaning that the EIS investment may be made one year before or three years after the date on which the capital gain was made
• Capital Gains tax exemption on disposal, after three years, on the part of the EIS investment that qualified for tax relief upon subscription.  Where an amount in excess of £500,000 was invested, CGT may be payable although taper relief should reduce the amount of tax payable
• Exemption from Inheritance Tax as the shares would qualify for business property relief as long as the share are held for two years
• Relief at the investor’s marginal rate is available for any future losses, which can be offset against income or capital, arising on shares which qualified for EIS relief on subscription
• It should be noted that the tax incentives above can be jeopardised where an investor is connected to the company prior to investing via the EIS.

NB...The favourable tax treatment currently available for EISs might not continue in the future.