In its 25-year history, the EIS has allowed nearly 30,000 SMEs to benefit from over £20 billion in investment capital. At its launch in 1993, Chief Secretary to the Treasury, Michael Portillo said: ‘The purpose of EIS is to recognise that unquoted trading companies can often encounter considerable difficulties in raising relatively small amounts of share capital. The new scheme is intended to provide a well targeted means for some of those problems to be overcome.” In the absence of readily-available business lending from high street banks, many entrepreneurs have turned their attention to private investors - not only as a source of funding, but also to capitalise upon the industry expertise which they can often bring to the businesses they back.
As start-ups and early-stage businesses carry greater investment risk than larger, more established companies, the EIS was designed to be tax efficient and therefore more attractive to investors.
The UK government wants the money raised under EIS to be used for suitable purposes and specifies a number of trades which do not qualify for EIS reliefs. Non-qualifying trades are set out on the Growthdeck website.*
So what are the attractions for an investor wishing to invest up to £1 million (the annual limit) in any single tax year into one or more qualifying companies?
30% Income Tax relief: an individual taxpayer can claim 30% relief on up to £1 million of investment per tax year under EIS. This can be claimed in the current tax year or may be claimed against the investor’s income tax liability for the previous year. Shares must generally be held for a minimum of three years from the date of issue for any income tax relief to be retained. An investor cannot claim EIS income tax relief in any one year which exceeds the total income tax liability for year.
0% Capital Gains Tax (CGT) to pay on any realised gain, provided the shares are held for a minimum of three years.
Inheritance Tax mitigation after a two-year holding period, EIS-qualifying shares are eligible for Business Property Relief and fall outside an investor’s estate for IHT purposes. This can result in 40% future tax savings for an investor’s heirs.
Up to 45% loss relief for higher rate income tax payers should the investment fail or result in any form of loss.
CGT Deferral relief – a capital gains tax liability arising from the sale of, say, quoted shares or a property, can be deferred if the gain is re-invested in an EIS-qualifying investment within three years of realising the gain. Although the capital gains tax liability becomes due and payable when the EIS shares are sold, the investor has effectively benefitted from an interest-free loan of a tax bill for the life of the EIS investment.
Let’s look at a couple of examples which underline the generous tax reliefs:
An investor subscribes £50,000 for an EIS qualifying company. He receives £15,000 in income tax relief which means that his investment has only cost £35,000.
If the investor is a higher rate tax payer, and the investment turns out to result in total loss, he can claim for loss relief at 45% on £35,000 (the net cost of his investment after the initial income tax relief) which would recover £15,750. So, although the investment was not a success, the investor’s net loss on the original £50,000 is only £19,250 (38.5%).
On the other hand, the investment might have returned, say, £250,000 after four years, and the £200,000 gain could have been realised completely free of CGT.
Another investor puts a £200,000 capital gain into an EIS-qualifying company. She receives £60,000 income tax relief and the 20% CGT she was due to pay is deferred until she sells the EIS shares. Taking the two reliefs together, she has saved £60,000 and delayed paying an additional £40,000 , so the cash cost of her EIS investment is only £100,000.
If you would like further details, visit www.growthdeck.com for more detailed information on this attractive scheme. If you are a private investor with an interest in learning more about EIS investing, get in contact with Sylvia Lennon at firstname.lastname@example.org.