What is EIS?
The Enterprise Investment Scheme (EIS) is a government initiative aimed at encouraging investment into small independent trading companies.
To achieve this, a variety of tax benefits are being offered to incentivise investment:
A 30% income tax relief, reducing the net cost of investment to 70p per £1 invested; Relief on investments of up to £1,000,000 – against a 2013/14 income tax liability; and carry back investments of up to £1,000,000 – against a 2012/13 income tax liability1.
A capital gains tax deferral, in which capital gains are deferred up to the amount subscribed for shares. This applies to gains arising up to three years prior to the last investment made by the manager in qualifying EIS companies (the “investee companies”) and up to one year after the first.
100% relief from inheritance tax for EIS qualifying investments held for more than two years.
Tax free growth; no capital gains tax is payable on gains realised on investment.
A share loss relief scheme is in place if EIS shares are disposed of at a loss (to net cost). That loss can be offset against income in the year of disposal or the previous year. This means that an additional rate taxpayer with sufficient income is only at risk for 38.5p per £1 invested2.
This is a medium-term Investment scheme so shares must be held for at least three years.
The investor has access to various investment strategies and sectors targeting capital growth and low risk investment opportunities.
- Assumes subscriptions are invested prior to 6 April 2014. See Risks Relating to the EIS in Part 6 of the Brochure.
- Based on a number of assumptions including the personal circumstance of an investor.
Why invest in an EIS?
They are a viable alternative investment in a climate of low interest rates, equity volatility, concerns about inflation and a reduction in tax relief for pensions, many advisers are now considering the relative advantages of EIS or VCT investments for their clients.
- Income Tax relief
- Capital Gains Tax deferral
- Put your Capital Gain in the right place to utilise a Capital Loss
- Inheritance Tax Planning
- Rolling EIS Investment programme
- Cash extraction scenario for owner managed businesses
- UK resident, Non Domiciled Individuals
- Pension Planning
Enterprise Investment Schemes (EISs) are very high-risk investments. An EIS investment is usually concentrated in one single unquoted trading company. Often there is no market for the shares and it may therefore be very difficult to make a disposal. There is a strong possibility of the chosen company failing.
Income Tax Relief case study
A 45 year old executive with a £180,000 income and an element of liquidity, looking for medium term returns with a desire to broaden his range of alternative investments:
|£30,000 taxed at 45%
|£117,990 taxed at 40%
|£32,010 taxed at 20%
- Invest £100,000
- Claim income tax credit of £30,000 (i.e. 30% of £100,000)
- Tax bill reduced from £67,098 to £37,098
|Taxable Income = £180,000 Tax Payable = £67,098
Note: Personal Allowance irrelevant at this level of income
A number of EIS investments are structured to mature after 3-5 years it is possible to reinvest the matured investment into another EIS to take advantage of the 30% income tax relief.
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The tax treatment of investments depends on individual circumstances and is subject to change in the future.
The availability of tax reliefs depends on the companies invested in maintaining their qualifying status.
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