What are…Enterprise Investment Schemes?
The Enterprise Investment Scheme (EIS) aims to help smaller companies to obtain finance by offering incentives to potential investors. Companies that qualify for EIS are significantly more attractive to investors than those that don’t
Investors can receive a tax rebate against their personal income tax equal to 30% of the amount of their investment as well as being able to sell their shares and pocket any capital gain tax free
How does EIS work?
If you subscribe for shares in a non-listed (or AIM listed) company performing a qualifying business activity you will (subject to both the company and you complying with certain requirements) be entitled to various tax reliefs. Particular requirements of note are that you must not sell your shares for a period of three years from the date of investment and must not enter into a transaction or arrangement by which your risk is reduced
You must not be connected with the company meaning that you can’t be a director, officer, employee or other paid consultant of the company and can’t hold either yourself or through associates 30% or more of the issued share capital of the company. In addition, your shares must not give you any preferential entitlement to receipt of a dividend or to capital (including on a winding up)
The definition of qualifying business activity includes any business other than property (including development, hotels and nursing homes), financial services (including dealing in commodities, shares and financial instruments, insurance, banking, legal and accountancy), receiving royalties or licence fees, leasing, shipping, agriculture, coal and steel production and shipbuilding
The available tax reliefs are as follows:
Income Tax Relief:
Income tax relief of 30% on the amount subscribed for EIS shares. The maximum relievable investment is £1million per annum, or up to £2million if the additional £1million is invested into ‘knowledge intensive’ companies. Relief can be carried back to the previous tax year, subject to being within the annual limit. The relief is only available on tax you actually pay and can only reduce your tax bill to nil
Capital Gains Tax Exemption: if you’ve received income tax relief on the cost of shares, you may sell the shares three years after they were issued free from capital gains tax
Loss Relief: if you sell the shares at a loss, you can elect for the amount of the loss (less any income tax relief already received) to be set against your income of the year in which the shares were sold, or any income of the previous year, instead of the loss being set off against any capital gains.
Capital Gains Tax Deferral Relief: the payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company within the period of one year before or three years after the gain arose
Inheritance Tax: once an EIS investment has been held for at least two years it will generally fall outside your estate for inheritance tax purposes
Single company or portfolio?
There are two ways to invest in EIS: by investing directly in a single EIS-qualifying company or by investing through a fund manager that builds up a portfolio for you
Both options could have a place in an experienced investor’s portfolio
Investing in a single company gives an investor greater visibility and control, but also carries greater risks because the success of your investment depends solely on the fortune of that company. Remember, many EIS-qualifying companies fail
Investing in an EIS fund affords you some diversification, usually within an area or sector. It also gives you the comfort that a professional manager is researching the opportunities and makes the investment decisions for you. That said, some or all of the portfolio companies could fail and you could lose money
With an EIS fund, you have far less control and visibility over where your money is invested. Moreover, the fund manager’s expertise comes at a price, so investing in a managed portfolio tends to be more expensive than investing in a single company
Please remember: all EIS investments are high risk and are only suitable for experienced investors. In addition, note that the initial tax reliefs are only available on subscription for new shares and so there are unlikely to be many potential purchasers of second-hand EIS shares. This means that it can be difficult to sell EIS shares
While the tax breaks of an EIS are attractive, you should always seek advice from a professional advisor before investing in EIS. Investment into companies who qualify for EIS can be highly risky, and you may lose all of your capital which you invest