Technical Briefings
17 December 2010
Enterprise Investment Scheme
The following is a brief guide to the tax advantages available for qualifying Enterprise Investment Scheme (EIS) investments.
Will I really pay less income tax?
Yes, you could save between £100 and £100,000 each year. Income tax relief at 20% is available on investments of between £500 and £500,000. So if you invested £500, your income tax liability would be reduced by £100 up to a reduction of £100,000 if you invested £500,000. Both you and your spouse can each invest up to the maximum each year. For 2009/10 onwards, investments can be carried back one year if there is unused relief
What about Capital gains?
When you dispose of EIS shares any capital gains will be exempt from tax subject to certain conditions. If the conditions for exemption are not satisfied the gain can be rolled into a further EIS investment. Although gains are exempt, losses can be relieved against any capital gains or you can elect to relieve losses against income.
Is everyone eligible?
You must be an individual liable to pay UK tax and you must not be “connected” with the company; i.e. an employee, a paid director, a controlling shareholder or holding more than 30% of the shares (or loan and share capital) or entitled to more than 30% of the voting rights or assets on winding up.
Can I invest in any company?
The subscription must be in cash and be for new shares issued to raise money for a qualifying company carrying on a qualifying business activity. There are a number of conditions which apply to the company, the trade carried on and the use of the funds by the company. We can provide specific advice on whether a company or investment fund is appropriate for this relief on request.
Are there any other reliefs?
Yes, Capital Gains can be deferred when you invest up to the annual limit of £500,000 each year. For example, if you have made a capital gain of £100,000 you can defer the whole gain if you invest a total of £100,000 or more in EIS shares between one year before and three years after the gain arising.
When the deferred gain “crystallises”, (this most commonly occurs when the shares are disposed of) any capital gains tax is payable according to the rules prevailing at that time. With careful planning the gain can be crystallised in stages to make use of the annual exemption for two or more years or to choose a time when tax rates are more favourable than when the gain originally arose.
This relief is available even if you create the company yourself or own more than 30% of the share capital, although, in the latter case, income tax relief is not available. EIS relief can be utilised on incorporation of your business and we can advise on this as considerable care is needed to satisfy the conditions and avoid the potential pitfalls.
Is everyone eligible for deferral relief?
You must be UK resident or ordinarily resident..For the deferral relief, you may be connected with the company.
Is it that easy?
The reliefs will be clawed back by HMRC and any deferred gain will immediately come into charge if, you and/or the company do not meet the qualifying conditions for three full years.
What now?
For more information on the potential benefits available to you, please contact your usual Wilkins Kennedy contact.