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Tax Helpsheets

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Enterprise Investment Scheme

The Enterprise Investment Scheme provides for some significant income tax and capital gains tax reliefs for individual investors in unquoted trading companies. There are some very complex conditions which must be met for the tax reliefs to be given, so this helpsheet can only give a brief overview of how the various tax reliefs work.

    Essentially the investors claim tax relief according to the amount they invest in new shares issued by the company under the EIS scheme, known as EIS shares.

Claims for the tax relief cannot be made until a certificate has been received from the company issued on the authority of HMRC.

The Tax Reliefs

There are three separate EIS tax reliefs that can be summarised as follows...

    30% income tax relief of the amount invested, which is set against the individual's personal tax liability, subject to there being enough tax liability to cover this. The relief is given in the tax year when the shares are subscribed for. The full amount subscribed for (subject to the £2m over-riding limit in 2020-21; but no more than £1m can be subscribed for shares that are not in a knowledge intensive company) can be carried back to the previous tax year.
  • Deferred tax on other capital gains. A claim can be made for any part of a chargeable gain on the disposal of any asset to be deferred to the extent that it is matched by a subscription for EIS shares within one year before and three years after the disposal. The tax on the deferred gain is rolled into the EIS shares and will become due on the disposal of those EIS shares, or if the individual ceases to be UK resident within 3 years of issue of the shares. The individual must be resident and ordinarily resident in the UK but there is no need to also qualify for income tax relief on the EIS investment.
  • No CGT on the disposal of EIS shares. There is no CGT payable if shares for which EIS income tax relief was granted are disposed of at a profit after a three year retention period from the date of issue, although any deferred gains rolled into those share may now become chargeable to CGT.

The Investment

The amount that can be invested into EIS shares is unlimited. However only £2,000,000 invested in any one tax year will attract income tax relief and capital gains tax exemption. Additionally, no more than £1,000,000 can be subscribed for shares that are not shares in a knowledge-intensive company.

For the purposes of investment a husband and wife or civil partners are treated separately.

The subscription must be wholly in cash (rather than loans) and the shares must be issued to raise money for a qualifying business activity. All of the money raised must be used for such an activity within 2 years of the shares being issued or if later within 2 years of commencing trade.

Individuals who qualify for tax relief

To qualify for the EIS income tax relief and CGT exemption the investor must not be connected with the company during a period starting two years before the issue of the EIS shares, and ending three years afterwards. This mainly excludes someone who is an employee or paid director of the company during that period, or who controls more than 30% of the company's voting shares. The shareholdings of associated persons such as spouse and children, but not a brother or sister, will also be taken into account. A subscriber can receive reasonable remuneration as a director of the company after the shares are issued.

Any investor can benefit from CGT deferral on investment in EIS shares, whether connected to the company or not.

The EIS Shares

The EIS shares must be new ordinary shares that are not redeemable for at least three years. They must be fully paid up at the time of issue and carry no preferential rights to dividends or assets on liquidation of the company.

The EIS Company

To issue EIS shares the company must be an unquoted company, which includes those listed on AIM, and there must be no arrangements for it to become quoted. For at least the three years after issuing the EIS shares it must carry on a trade or trades that do not include to a significant extent (taken to be 20% or more) an activity that is specifically excluded by the legislation. Excluded activities include leasing, banking, accountancy, dealing in land and land based trades such as farming, property development or nursing homes.

The total gross assets of the company must not exceed £15 million before the issue of shares nor £16 million afterwards. The company must have fewer than 250 full time employees (or equivalent part-timers) at the time the shares are issued. The permitted limit is 500 if the issuing company is a ‘knowledge-intensive company’ at the time the shares are issued.

No more than £5 million can be raised under the EIS, VCT or corporate venturing schemes in a 12 month period.

The company must not be in difficulty and must have a permanent establishment in the UK (but does not need to be carrying on a qualifying trade wholly or mainly in the UK).

Withdrawal of Reliefs

The tax reliefs can be taken away if the EIS shares are disposed of within three years of issue, the company ceases to qualify as unquoted or trading, or the individual becomes connected with the company during the same year period. The tax relief may also be withdrawn if the investor receives value from the company in the period beginning two years before the issue of the shares to three years afterwards.

How We Can Help You

We can advise you on all aspects of qualification for both income tax and capital gains tax reliefs for EIS investments.

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