The Enterprise Investment Scheme (EIS) is designed to encourage investments in small unquoted companies carrying on a qualifying trade in the United Kingdom.
Investments in companies that are not listed on a stock exchange carry a high risk. The tax relief is intended to offer some compensation for that risk.
EIS offers both income tax and capital gains tax reliefs to investors who subscribe for shares in qualifying companies.
An individual with no more than a 30% interest in the company can reduce his income tax liability by an amount equal to 30% of his share subscription. The maximum subscription per investor is currently £1,000,000 per annum; yielding a potential reduction in tax liability of £300,000 per annum, (assuming the investor has sufficient income tax liability).
Deferral of gains realised on a different asset, where disposal of that asset was less than 12 months before the EIS investment or less than 36 months after it.
No capital gains tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.
If EIS shares are disposed of at any time at a loss, such loss can be set against the investor’s capital gains or his income in the year of disposal.
EIS Investments are exempt from inheritance tax after two years of holding such investment, subject to the Company being allowable under Business Property Relief (“BPR”).
What’s the best time to invest in an EIS?
You may be thinking that there’s no need to think about EIS until January next year. But before you pack up for a well-deserved summer break, make a note to check your EIS investment needs in September.
Many of you probably have income tax or CGT to pay in January 2016. An EIS investment is one way to avoid or defer paying. The key question is when to make that EIS investment.
You will need an EIS3 form to send to HMRC in January. It typically takes a month or two to get the EIS3 form after the investment has been made. That means investing in October/November. So September is a crucial time for you to select the right EIS.
How risky is EIS investment?
Investing in unquoted shares is clearly a higher risk but there are a number of ways to partially mitigate the risk of EIS investments.
You can choose to invest in asset backed EIS only (normally termed exit strategy EIS investments).
You can invest via a portfolio EIS provider and the provider can select a variety of EIS schemes – rather than invest all of your monies in one EIS.