Our Guide to EIS Tax Relief

Posted by Mo Rassolli on Feb 04, 2020 07:07: AM
Mo Rassolli
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What is EIS?

The Enterprise Investment Scheme (EIS) is an investment program in the United Kingdom designed to help smaller, but high growth potential companies raise capital by offering tax relief to investors who invest in such companies by buying their shares. This creates a win-win situation both for smaller companies as they are able to raise finance to fund their growth while at the same time providing tax incentives to investors who can invest up to £1,000,000 per person per year in qualifying companies.

What makes the EIS all the more lucrative is the 'carry back' facility where investments can be applied to the preceding tax year.

The Enterprise Investment Scheme made simple

The Enterprise Investment Scheme was launched by the government in 1993 to help smaller startups raise capital by giving their investors incentive in form of tax relief. The maximum amount of tax reduction a taxpayer can claim annually is 30% of the investment or £300,000, whichever is less. In addition to the tax reduction, the EIS also provides incentives on capital gains tax i.e. the total gain you make on your shares after you decide to sell them. Interested investors can purchase shares of the qualifying companies from them directly or through an EIS fund.

Another important thing to note is that EIS allowances are allocated individually. What it means is that a married couple, for example, John and Sarah can invest £1,000,000 individually in one tax year (total £2 million each tax year) and claim tax relief. Also, the shares of the company in which the investment is made must be held for three years from the date of purchase; failure to do so will lead to the withdrawal of tax relief.

Learn more about the Enterprise investment scheme by downloading our Investors Guide

Rules and Regulations guiding the Enterprise Investment Scheme Tax Relief

In order to qualify for tax relief, the investors must adhere to specific rules and regulations put in place by the government.

The first rule is that the investor must make payment for the shares at the time of purchase. Shares brought without payment or with delayed payment will not be eligible for tax relief.

Also, as mentioned previously, the investor must hold the shares (which are ordinary shares) for a minimum period of three years to be eligible for tax as well capital gain exemption.

Benefits of investing in an EIS qualified company

If you invest £10,000 into an EIS company or fund, your capital at risk becomes just £7,000 as you get back 30 % or £ 3,000 income tax relief. What if the startup soon establishes itself in the market and your investment simply doubles from £10,000 to £20,000. Under such a situation, you would benefit from:

1. Exemption from long-term capital gain tax

2. Loss relief of £4,200 for a person in the 40% tax bracket

3. The real net return more than the original value as in reality you are only investing £7,000.

Compare this to buying shares in a publicly traded company where your fortune hinges upon the rise or fall of the company. In case of EIS, you are offered income tax and loss relief benefits along with tax exemption on your long-term capital gains. 

 

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Topics: tax, investment, EIS