Chancellor George Osborne has identified the EIS as important for encouraging investment in small business. The reliefs, which the Office of Tax Simplification calls ‘four reliefs in one’, are highlighted below, while the business rules can be found in Enterprise Investment Scheme (EIS) – The Rules Condensed.
Income tax relief
From 6 April 2012, the investor may invest up to £1,000,000 (combined maximum for the EIS and venture capital trust investment) in a tax year and obtain a tax reducer of 30% of the amount of investment. It is possible to carry back the amount paid to the previous tax year. Any amount may be carried back, subject to the overriding maximum for the previous year not being exceeded. Dividends received are not subject to income tax.
Capital gains tax exemption
If the investor has received income tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for at least three years from the date of issue of the shares (or three years from the date of commencement of the qualifying trade, if later), then any capital gain on the disposal of the EIS shares will be exempt from capital gains tax.
Capital gains tax deferral
Capital gains realised on the sale of any asset may be deferred against investments in an EIS; the gains crystallise when the EIS investment is disposed of.
If the shares are disposed of at a loss, you can elect that the amount of the loss, less any income tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.
Let us look at some of these reliefs more closely by way of an example.
Withdrawal of relief
One of the biggest problems with EIS is that the tax reliefs will be withdrawn if, during the three-year qualifying period, either:
- the investor or an associate becomes connected with the company
- the company loses its qualifying status
- any of the shares are disposed of (unless the disposal is to a spouse or civil partner - in those circumstances the shares are treated as if the spouse or civil partner had subscribed for them)
- the investor (or an associate) 'receive value' from the company (or a person connected with that company). Receiving value is broadly defined and includes receiving a loan or benefit from the company, or receiving an asset from the company at below market value.
There is an obligation to inform HM Revenue & Customs within 60 days should any of the events above occur.