What are the reliefs?
- The main tax relief available is that 30% of your investment can be used to reduce your income tax liability.
- In theory, there is no minimum amount an investor can invest into any one company. However there is a maximum investment of £1million per investor per year.
- An investor is able to ‘carry back’ all or part of their investment to the preceding tax year provided that they do not exceed the relevant limits.
- Any gains realised on the EIS shares when they are sold are capital gains tax free, provided they have been held for at least three years.
- If an investor disposes of their EIS shares at a loss, that loss can be offset against capital gains or income in the year of disposal (or carried back to the preceding year), therefore reducing tax liabilities further.
- EIS shares that have been held for at least two years at the time of death will attract full relief for Inheritance Tax purposes and would therefore not be chargeable to inheritance tax.
- Capital Gains Tax on gains realised on different assets can be deferred if you invest your gain into EIS qualifying shares.
Investors need to be aware that there are strict rules for both individuals looking to invest and for the type of company you are allowed to invest in.
Case Study
(for illustrative purposes only)
Mr Thrifty received inheritance of £175,000 from his late Aunt Annie.
After purchasing his new Tesla for £75,000, Mr Thrifty chooses to support two small local businesses, Tech Ltd and Widget Ltd with a £50,000 investment in each.
Both Tech Ltd and Widget Ltd are EIS qualifying companies and Mr Thrifty’s investment qualifies for EIS relief.
Immediate Relief
Mr Thrifty can claim EIS relief in the year of investment amounting to 30% of his investment. This is a tax reducer; therefore, Mr Thrifty can offset £30,000 against his tax bill.
In the current tax year, Mr Thrifty’s income tax liability totalled £18,000, he therefore opts to carry back the remaining £12,000 to the preceding year. The net cost of his investments is now £70,000.
| 2023 | 2022 | |
| Total taxable income | £76,420 | £65,170 |
| Income Tax without EIS relief | £18,000 | £13,500 |
| EIS relief | (£18,000) | (£12,000) |
| Income tax payable with EIS relief | £0 | £1,500 |
5 years later
Tech Ltd becomes a successful technology business and Mr Thrifty’s shares are purchased by a global firm for £500,000.
Mr Thrifty realises a £450,000 gain on his investment which is free from Capital Gains Tax due to the EIS relief.
| 2028 | |
| Tech Ltd Share Proceeds | £500,000 |
| Original Cost | (£50,000) |
| Capital Gain | £450,000 |
| Capital Gains Tax without EIS relief | £90,000 |
| Capital Gains Tax with EIS relief | £0 |
Widget Ltd, is less successful however, and goes into
liquidation. Mr Thrifty’s shares are worth £0, and he has realised a loss of
£50,000. As he received relief in his year of investment amounting to 30% of
his original investment, the net loss he realises is £35,000.
This loss can be offset against any other income and gains realised in the year or the previous year. In 2028, Mr Thrifty is a higher rate taxpayer and therefore saves tax at 40%, or £14,000.
Despite the investment being unsuccessful with Mr Thrifty losing a gross amount of £50,000, this does not represent the real net loss which equates only to a loss of £19,250. Therefore, Mr Thrifty has only experienced a real cash loss of 38.5% of his investment.
| 2028 | |
| Taxable Income | £85,170 |
| EIS loss relief | (£35,000) |
| Total taxable income | £50,170 |
| Income tax payable without EIS relief | £21,500 |
| Income tax payable with EIS relief | £7,520 |
What are the qualifying conditions for investors?
- The investor must subscribe for newly issued shares for cash.
- An individual may not be ‘connected’ to the company. This means that, the individual cannot be an employee, partner, or director (although they may be an unpaid director, or possibly a paid ‘business angel’ investor); nor can they have more than a 30% interest in the company (i.e. 30% of the share capital, or voting rights, or the rights to assets) or any subsidiary.
- No partner or associate of the investor (such as a spouse or relative) may have other interests in the company.
- The investor must hold the shares for at least three years (and possibly up to five years, if the company began trading after the shares were issued).
- If an individual disposes of their shares within three years, any reliefs are likely to be clawed back.
What are the qualifying conditions for companies?
- The company must be a ‘small company’, and as such cannot have [net] assets of more than £15million before the shares are issued, or £16million immediately after.
- It must have fewer than 250 full-time employees.
- The company cannot be listed on any recognised stock exchange – or have any intention of becoming listed – at the time the shares are issued (although the Alternative Investment Market (AIM) is not treated as a recognised market under EIS rules).
- While most trading companies qualify, there are a number of ‘excluded activities’ including property development, farming, coal and steel production, hotel and nursing home operation and management, and many financial activities.
- All capital raised by the issue of shares must be actively engaged in the qualifying business activity within two years of the shares being issued.
- The company must be trading in the qualifying activity for at least four months after the share issue before an investor is eligible for EIS relief.
The rules surrounding the EIS can be quite complex, so it is important that you get expert advice about investing in such schemes as early as possible.