An overview of the enterprise investment scheme (EIS) – what it is, how it works and how it might just save you a fortune…
Let me first preface this blog post by warning that it is a tax-related blog. This would usually be the end of interest for many of us that find the topic of tax rather dull and outright boring. However, if you’re interested in learning how to qualify for government initiatives designed to reduce your tax liabilities, you may just want to keep on reading.
What is the EIS?
The enterprise investment scheme, or eis, is a government scheme to provide capital gains tax (cgt) relief and income tax relief to individuals that invest in small companies. Hmrc explains that the scheme is designed to ‘mitigate the increased risk from investing in companies which are not listed on the london stock exchange’.
How does the scheme reduce my tax liabilities?
Broadly speaking the scheme covers both the tax implications of both buying (income tax relief) and selling (capital gains tax relief) the shares. When purchasing the shares you can qualify for tax relief at the rate of 30% (provided that the shares are part of a ‘qualifying investment’ – more details on this later on). So, to give a practical example, if you purchased £100,000 of shares as part of a ‘qualifying investment’ you would be able to claim up to £30,000 of relief on your income tax bill. It’s worth pointing out at this juncture that, unfortunately, if your income tax liability was less than £30,000 you wouldn’t receive the difference or ‘credit’ from hmrc. In addition to the income tax relief, you’re also eligible for capital gains tax (cgt) relief – provided the shares have been held for 3 years or longer. Better still, in the unlucky scenario where the shares lose value, any loss can be offset against income tax liability or future capital gains tax liability (conditions apply).
What is a qualifying investment?
Picking germany out of the hat at the office world cup sweepstake might sound like a qualifying investment, but for the purposes of the eis scheme, it’s unfortunately not!
A qualifying investment, for the purposes of the eis scheme, means that certain conditions have been met, such as: the amount of money invested in a company (there’s no minimum but the maximum is capped at the rather large figure of £10million), the investor’s connection with the company (the investor can’t be a paid director of the company already), the company must have less than £15million of assets and the investor’s shares cannot have any preferential rights.
Additionally, there are certain restrictions relating to business activities (for example, an investment in a company specialising in banking or insurance will not qualify for the eis scheme). A full list is available on the hmrc website – just search for the eis scheme.
Of course, as with all tax-related initiatives, there is unfortunately a rather substantial list of conditions to be met in order to qualify and, frankly, we don’t want to bore you with every tiny detail so we’ve only included a few of the major conditions. However, taking into account the potential tax breaks available, it’s certainly worth a quick chat with your accountant if you think that you may have a qualifying investment.
The contents of this article are intended solely for information purposes only and should not be construed as legal advice or opinion in any specific facts or circumstances.