02: The enterprise investment scheme

The EIS structure first appeared in 1994 as a replacement for the business expansion scheme (BES). There are currently two main types of EIS offerings available to investors:

• Individual unlisted companies which meet the EIS requirements; and
• Funds which invest in a portfolio of EIS-qualifying companies. These are quite rare.

The main tax reliefs for EIS investment are:

Income tax reliefs

Tax relief is given at the rate of 20% on investment in newly issued shares in EISs.

The relief is given as a tax credit against the investor’s tax liability, so you must have an income tax liability at least equal to the tax credit claimed for the full relief to be obtained. Relief is clawed back if the shares are disposed of within three years.

The maximum investment that can qualify for income tax relief is £500,000 per tax year, while the minimum investment in any one EIS company is £500.

Subject to the £500,000 maximum, it is possible to carry back some relief to the previous tax year. This option is only available for shares issued between 6 April and 5 October, and is subject to a maximum which is the lesser of:

• One-half of each investment made during the relevant period; and
• £50,000.

If shares are disposed of at a loss after three years, then the amount of the loss, less the initial income tax relief, can be set against taxable income or capital gain.

Capital gains tax reliefs

The first disposal of shares is exempt from capital gains tax, provided income tax relief has not been withdrawn. As mentioned above, a loss may be offset against other capital gains.

Investment in an EIS also allows capital gains to be deferred, to the extent that the gain is matched by the EIS investment. The gain deferred is the gross gain, after deduction of any annual exemption but before any taper relief (for reinvestment of gains realised in tax years before 2008/09). There is no upper limit for this relief. On disposal, the deferred gain becomes chargeable to tax with no taper relief . However, the effective tax rate on gains may still be lower than originally charged because of the move to an 18% flat rate.