For those investing in new companies, perhaps as part of a Seed investment round, there are a number of tax schemes to make such investment more attractive to investors. One such scheme is the Enterprise Investment Scheme.
As part of the EIS, the investor receives income tax relief, personal capital gains tax relief, inheritance tax relief and there is also tax relief in the event of a loss.
Income Tax Relief
The income tax relief for the investors is that they can claim back up to 30% of the value of their investment in the form of income tax relief. For example, if you invest £1,000, then you can save £300 in income tax.
Capital gains relief
If the investor holds the shares for at least three years (or three years from trading, if the company didn’t start trading until after the shares were issued), then the shares are exempt from capital gains tax when the investor sells them – if the income tax relief wasn’t restricted (unless the only reason why it was restricted was because income tax was was reduced to zero)
And if the investor has made a capital gain on an asset and uses that gain to invest in EIS shares, then the Capital Gains Tax can be deferred (delayed) until the EIS shares are disposed of.
If the company fails or performs poorly and the investor loses money on their investment, then they can claim loss relief on the amount lost.
For example, if the investor had invested £1000 and the shares are now worth nothing, the investor would have already received £300 in tax relief, leaving £700 of loss. If the investor pays income tax at 40% then they would claim 40% of £700 (which is £280), so the investors actual loss would only be £420. The loss relief can also be claimed in the previous tax year that the shares were sold/disposed of.
Inheritance Tax Relief
Investors can claim inheritance tax relief on EIS share purchases after 2 years. This does not apply to shares listed on a recognised stock exchange.
- There is a maximum of £1,000,000 than any investor can invest in qualifying shares.
- The shares must be held for at least three years. If they are held for less than 3 years, the tax relief can be clawed back (or withdrawn)
- EIS tax relief cannot be carried forward but investors can treat some of their EIS shares as being purchased in the previous year (effectively “carrying back” the EIS income tax relief to the previous year), if they have not reached their limit for EIS shared purchased (which is £1,000,000 check this) An investor would do this if they had not reached the EIS limit in the previous tax year but expects to reach the limit in the current tax year.
- The investor must be a UK taxpayer.
- The investor (or their associates – generally relatives, business partners, cannot be connected to the EIS company (can’t be an employee, a partner, a paid director, hold more than 30% of the company’s shares, rights to assets if the company is wound-up, voting rights, loan capital for SITR.
- The shares must be newly issued and paid for in cash.
“Risk to Capital” Condition
There must be genuine “risk to capital” – the EIS scheme must not simply be a tax avoidance exercise without commercial risk. This is a critical condition of the scheme.
The “risk to capital” condition will not be met if there are risk-reducing arrangements in place that result in an investor having priority over other investors, being able to withdraw their money as soon as possible, protecting their money so that other investors’ money is used first, or having special rights to the company’s assets if it closes down.Find out about #EIS tax relief on investments and shares Click To Tweet
If the company has made a successful EIS application, then the company will issue EIS3 forms to the investors. The company does not apply for your personal tax relief. You claim the EIS tax relief on your personal tax return. Most of the details that you will need (for example, the name of the company invested in, the amount, the date of issue of the shares and so on) are shown on the EIS3 form. You are not required to send the EIS3 into HMRC unless requested but you cannot claim tax relief without having been issued with the EIS3 form from the company.
However, receipt of an EIS3 form does not automatically entitle the investor to tax relief. There may be personal circumstances why you cannot claim all of the EIS tax relief – for example, you may have invested more than £1,000,000 in qualifying shares. or your tax liability is not high enough to be able to claim all the EIS tax relief – so you may have to forgo some of the unused EIS tax relief.