Enterprise Investment Schemes

Helping smaller trading companies brings investor relief

The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

All shares must be paid up in full, in cash, when they are issued. They must be ‘full-risk’ ordinary shares, with no preferential rights to dividends, or to the company's assets in the event of a winding up. There must also be no arrangements to protect the investor from the normal risks associated with investing in shares, and no arrangements for the shares to be purchased by anyone else after the end of the relevant period.

The tax benefits of an EIS are only available when new shares are bought. If the existing shares of an EIS eligible company are bought on the secondary market, then none of the tax benefits are available via the EIS.

Provided an EIS qualifying investment is held for no less than three years, an individual can reduce their income tax liability by an amount equal to 20 per cent of the amount invested. The minimum subscription is £500 per company and the maximum per investor is £500,000 per annum. Where an individual subscribes for qualifying shares before 6 October in a tax year, a claim may be made to carry back one half of the amount subscribed to the previous tax year, subject to a maximum of £50,000.

Tax on gains realised on a different asset can be deferred indefinitely, where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it. Deferral relief is unlimited, in other words, this relief is not limited to investments of £500,000 per annum.

No Capital Gains Tax is payable on the disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares. If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such loss can be offset against the investor’s capital gains or income in the year of disposal or the previous year. For gains offset against income tax, the net effect is to limit the investment exposure to 48p in the £1 for a 40 per cent tax payer if the investor realises a total loss.

Alternatively, the losses can be offset against Capital Gains Tax at the prevailing rate, which is 18 per cent in the current tax year. In addition, EIS Investments are generally exempt from Inheritance Tax after two years of holding such investment.

If at any time you are unsure about how much risk you are prepared to take and what approach is appropriate for your particular situation, you should speak to us to receive professional advice.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment can go down as well as up and you may not get back the full amount invested.