Enterprise Investment Scheme (EIS)
What is an EIS?
An EIS is a government incentive scheme that provides tax breaks to investors for buying qualifying shares in qualifying companies.
The intention of the EIS is to help smaller, high risk firms raise capital funding by offering potential investors generous tax incentives to attract them.
The rules relating to qualifying companies are complex and more information can be found at www.hmrc.gov.uk/eis
However for the purpose of this guide the basic rules are as follows:
Eligible shares are any new ordinary shares that are issued by the company without any preferential right to dividends or assets on liquidation of the company.
The shares must be paid up at the time of issue and may not be redeemable.
A qualifying company must be carrying on a trade in the UK, but does not have to be resident in the UK for tax purposes.
Certain trades are not considered qualifying and therefore are ineligible for EIS status, these are businesses dealing in land and/or property backed services, financial activities, legal and accountancy services.
Companies must be unquoted. For the purpose of the EIS companies listed on the Alternative Investment Market (AIM) are considered unquoted.
Gross assets of the company must not exceed £7m prior to investment, or £8m after investment.
Companies must have fewer than 50 employees.
Four main types of EIS...
There are four methods of investment in to an EIS.
Single EIS company - this is the highest risk method as it involves investing in a single company. Access to capital will also be limited if not denied until the company is sold.
EIS portfolio - this type of service is typically offered by discretionary investment managers that will buy a portfolio of companies to spread the risk.
Approved EIS funds - this type of fund will invest in a similar way to the EIS portfolio, but will have a fund structure and therefore carry different legal implications. One of these is that the fund must invest at least 90% of its assets within 12 months of launch.
Unapproved EIS funds - in practice this type of fund is a combination of the approved fund and the EIS portfolio.
Five major tax breaks...
- 20% income tax rebate is payable based on the initial investment amount subject to a maximum investment of £500,000 per tax year. The level of tax rebate is subject to the amount of tax paid by the investor in that tax year.
- Gains made on sale of an EIS holding are free of capital gains tax.
- Capital gains made on an investment elsewhere can be invested in to the EIS to defer the capital gains tax that would otherwise be payable on that gain.
- Losses realised on the sale of an EIS can be used to offset any future capital gains made elsewhere on other investments.
- The value of a holding in an EIS is generally free of inheritance tax so long as the shares have been held for two years or more.
Investing in an EIS is a specialist area and advice should be sought from an adviser that is knowledgeable in the area of EIS investments.
Tax levels, bases or reliefs referred to are those currently applying but are subject to change. The tax treatment of investments will depend on the individual circumstances of the investor.
