Enterprise Investment Schemes (EIS)
A qualifying EIS investment is essentially the purchase of newly issued shares in any unquoted trading company whose trade complies with guidelines set out by Her Majesty’s Revenue and Customs (HMRC). For EIS purposes unquoted means not listed on a recognised stock exchange, for instance the Alternative Investment Market (AIM).
The Government passed legislation to incentivise investment into qualifying EIS shares byUKtaxpayers by offering a most attractive tax break package. However, no income tax relief can be claimed if the investor was previously associated with the investee company. A company is granted EIS status by HMRC who assume it will remain qualifying until notified otherwise. An EIS qualifying company cannot have gross assets of more than £15m before the investment and £16m after it. No more than £5m can be invested into the company and it must have fewer than 250 employees.
For tax year 2014/15 investors in EIS qualifying shares receive 30% income tax relief on the first £1,000,000 invested. The investment must be held for three years to avoid the tax reliefs being lost. Up to £1,000,000 invested may be backdated to the previous tax year to obtain tax reliefs for that year. Sufficient income tax must have been paid to obtain repayment.
Investors may defer unlimited Capital Gains Tax liabilities by investing the gain into qualifying EIS shares. This relief will be given provided the EIS qualifying shares are purchased during the period beginning three years after or twelve months before the disposal that gave rise to the chargeable gain. However although this deferral relief is without limit only the first £1,000,000 of the investment will receive the 30% income tax relief.
Any deferred gains will be reinstated if the investor disposes of the shares or ceases to be resident in theUKwithin three years of the issue of the shares (or within three years of its initial trading date, if later). In addition the investor ceases to qualify for the 30% income tax relief and any tax rebate would have to be repaid.
There is no Capital Gains Tax liability where a profit is realised on the disposal of EIS shares. An investor who acquires ordinary shares in an EIS qualifying company will be liable forUKincome tax on any dividends paid by that company.
After being held for two years EIS qualifying shares qualify for inheritance tax purposes for 100% business property relief. There is no limit on investment into EIS qualifying shares, including for inheritance tax mitigation purposes.
The value of EIS investments will fluctuate and their performance may be quite volatile. Capital values can go down as well as up and the investor may not receive back as much as was originally invested. Although the tax benefits are very attractive investors have to be mindful that investing in to an EIS carries a high degree of risk. For this reason investors need to be sure that they have the capacity to cope with any capital loss that might arise out of making such an investment.
In the event of a loss occurring when an EIS investment is realised there is a further income tax break available to the investor. If a company loses EIS status within three years the tax benefits for the investor will be lost resulting in any repayment being paid back to HMRC.
Because of the risks attaching to such an investment and the specialised nature of the planning all investment should be made with the benefit of advice from a suitably qualified regulated person. EIS are most suitable for those individuals who can view such an investment as a long-term investment (three years minimum) and who have already a portfolio of investments to which this new asset class can be added without materially changing their overall risk profile.