What Is An Enterprise Investment Scheme (EIS) And How Investing Works
EIS An Introduction
EIS (Enterprise Investment Scheme) are structured to help high risk, smaller companies raise finance by offering tax relief on new shares in those companies. For investors, it is a tax efficient way to invest in smaller companies with up to £1,000,000 per year across any number of companies.
An added attraction is the ‘carry back’ facility. Investments can be applied to the preceding tax year to the benefit of the investor.
When the scheme was launched in 1993, Michael Portillo, Chief Secretary to the Treasury said: “The purpose of Enterprise Investment Schemes is to recognise that unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well-targeted means for some of those problems to be overcome.”
2 decades on, those “considerable difficulties” in raising small amounts of capital are still big issues for businesses.
Essentially EIS’s are pre-IPO companies and not listed on an exchange. There are several ways to invest, either in single companies, or a collective investment such as an EIS fund. Typically, they will be managed by a venture capitalist and will focus on growth and capital preservation for the investor.
- Income tax relief of 30 per cent. Invest £10,000 in an EIS company, you can deduct £3,000 from your income tax bill that year.
- Pay no capital gains on profits from an EIS investment. Invest £10,000 and five years later sell your shares for £20,000, you’ll get the full £10,000 profit.
- Make a loss? you can offset that loss against income tax. If you lose your entire £10,000 investment. Because of income tax relief, your actual loss is only £7,000 (£10,000-£3,000). If you choose, you can reduce your taxable income, resulting in a saving of £2,800 for a higher-rate taxpayer. If you want to offset your loss against other capital gains in the normal way, you can of course do this instead.
- There’s no inheritance tax to pay on shares bought through EIS companies.
- To be eligible for the tax breaks, you generally have to hold the shares for at least three years.
- You still have to pay tax on any dividends – however most small private companies won’t pay dividends.
- There are certain business you can’t invest in (it can’t be a bank, a farm or a nursing home, for example).
- You can’t be connected to the company or have a stake of more than 30 per cent in it.
- You can invest a maximum of £1 million each year.
Seed Enterprise Investment Scheme (SEIS) Tax Breaks
The Seed Enterprise Investment Scheme is newer than its parent initiative, having been set up in 2012. SEIS is very similar to EIS but designed for investing in even smaller companies. While the maximum workforce and gross assets allowable under EIS are 250 staff and £15 million respectively, SEIS has lower limits of 50 staff and £200,000 gross assets. Businesses must also be less than two years old (there are no age restrictions under EIS).
- Income tax relief of 50 per cent, not 30 per cent. £5,000 off your income tax bill for investing £10,000.
- There’s no capital gains tax to pay on profits, no inheritance tax, and you can claim loss relief in the same way.
- There is an extra relief called capital gains reinvestment relief. This is useful to you if you have recently paid capital gains tax on other investments. You can reclaim up to 50 per cent of the tax paid if you reinvest that money into SEIS.
Tax reliefs available through SEIS are so generous that for the 2012/13 tax year, they added up to a potential 100.5 per cent of your investment in a situation where that investment was a complete failure. You literally could not lose provided you had paid enough tax to offset your SEIS investment against.
- For the 2013/14 and 2014/15 tax years, the downside protection has fallen 86.5 per cent – so you’ll get back £8,650 from a £10,000 investment that totally fails if you pay enough tax to use all the reliefs. This is still an excellent safety net.
- The maximum you can invest through SEIS in any tax year is £100,000.
- Should the investor be connected to the company, they are not eligible for Income Tax Relief. Connections are defined through financial interest or employment.
- An individual is connected with the company if they control the company or hold more than 30% of the share capital or voting rights. These conditions apply for up to 2 years before and 3 years after the share issue. If during this time, the individual becomes connected, then the relief will be withdrawn. All relatives except brothers and sisters are included within these restrictions.
- Partners, directors and employees of the company are all connected with it and therefore not eligible, as are associates. Associates are business partners, trustees and relatives. Again, these conditions apply for up to 2 years before and 3 years after the share issue. The only exceptions are Business Angels – where the connection is as a director who receives no remuneration from the company.
Claiming Your Tax Relief
The investor can only claim relief once the company sends through an EIS3 form. Claims are made through the Self-Assessment tax return for the tax year in which the shares were issued. Claims can be made up to five years after the investment after the first 31 January following tax year in which investment was made.
Tax Relief That is Reduced or Withdrawn
Tax relief will be withdrawn if you become connected to the company or if the company loses its qualifying status. The relief will be either reduced or withdrawn if the Shares are disposed of or if the investor receives “value” from the company such as a loan or an asset below market value.