What is EIS?
Launched in 1994, the Enterprise Investment Scheme, EIS, is a government programme designed to encourage investment in smaller, unlisted companies by offering a range of substantial tax reliefs.
What are the benefits of investing in companies qualifying under EIS?
EIS is a tax-efficient opportunity for investors who are looking for an alternative source of higher, long term growth potential for their investment portfolio.
Here is an outline of the tax breaks available to investors in EIS-qualifying companies:
Income tax relief
The scheme offers an upfront 30% reduction of income tax on the amount invested (up to a maximum of £1m), provided the EIS investment is held for a minimum of three years.
Income tax relief opportunities allow investors to substantially lower their tax burden, effectively reducing the cost of their investment. As a result, they can invest in innovative and growth-oriented ventures while supporting emerging companies.
Capital Gains Tax exemption
Capital Gains Tax (CGT) exemption is available for gains arising from the sale of the holdings. In order to be eligible for CGT exemption, EIS investments must be held for at least three years.
Any capital gains realized from the sale are exempt from CGT when you sell your EIS holdings after this minimum holding period. Hence, the profit you make from your investment remains untaxed, allowing you to keep a more significant portion of your returns.
Capital Gains deferral relief
Additionally, investors are entitled to unlimited Capital Gains Tax deferral relief on condition that the investment is made less than 36 months before the date of the issue of shares in the EIS investment, and no more than 12 months after it.
The availability of CGT deferral relief provides investors with a valuable tool for tax planning. It allows you to choose when to realize and pay taxes on your capital gains, giving you flexibility in managing your tax liabilities. You can strategically time the payment of your capital gains tax to align with your overall financial planning and cash flow needs.
EIS holdings are eligible for loss relief in the event that EIS shares are disposed of at a loss. Losses can be offset against the investor’s capital gains or income either in the tax year in which they arise or the preceding financial year.
If you are a 40% taxpayer, the loss relief will limit the maximum exposure to 42.5p in every pound you have invested, while for a 45% taxpayer the same relief mitigates downside exposure to 38.5p in the pound.
Inheritance tax relief
Provided funds have been held for at least two years, investors in EIS companies are eligible for Inheritance Tax exemption (IHT).
For individuals with substantial investments in EIS companies, this relief can help preserve family wealth for future generations. It allows investors to pass on the value and potential growth of their EIS investments to their heirs without the assets being eroded by inheritance taxes, which can be substantial in some cases.
Given the complexities of Inheritance Tax and the specific requirements for EIS investments to qualify for relief, investors should consult with financial advisors and wealth management experts. They can help individuals navigate the intricacies of the tax code and ensure that their investments and estate plans are structured optimally.
Strength to strength
Since EIS was launched in 1994, over £14 billion has been raised and more than 24,500 companies have benefited from investment via the scheme. In 2014–15, 3,130 companies raised a total of £1.7 billion of funds under EIS.
In the current investment climate of stock market volatility and low interest rates, the scheme’s high growth potential and substantial tax relief will continue to drive demand for its assets among higher rate taxpayers’ portfolios.
For more information on EIS and other alternative assets, visit: https://www.coinvestor.co.uk/.