What is the Enterprise Investment Scheme?
The Enterprise Investment Scheme (EIS) is a government backed initiative. The scheme encourages investors to buy shares in companies that are higher risk. In exchange, individuals receive generous tax reliefs.
Under the Enterprise Investment Scheme, businesses can raise up to £5m each year. Although, a business can only claim up to £12 million in its lifetime.
For a business to be eligible for funding under EIS, it must be within seven years of its first commercial sale. Gross assets must not be worth more than £15 million before shares. Furthermore, the business must have less than 250 full-time employees.
Businesses must follow the rules of the EIS in order for investors to claim and maintain tax reliefs. Although, if the business does not follow the rules, tax relief can be withheld or withdrawn from investors.
What can the investment be used on?
Money raised from investments must go towards a qualifying business activity, including:
- A qualifying trade
- Preparing to carry out a qualifying trade and start within two years of the investment
- Research and Development which aims to lead to a qualifying trade
The money invested into the business must:
- Be spent within two years of the investment, or if later, the date the business commenced trading
- Not go towards buying all or part of another business
- Pose a risk to the investor’s capital
- Be used to grow and develop your business
What tax relief can investors benefit from?
Income Tax Relief
One of the most attractive benefits when investing in an EIS is income tax relief. In effect, investors can claim an annual investment of up to £1m, or £2m if the investment is in a knowledge-intensive business.
Tax relief is available to investors for up to 30% of their investment, totaling up to £300,000 per year. Although, investors in knowledge-intensive companies can claim up to £600,000 in tax relief per year.
When investing in companies in their early stages, there is an element of risk involved. This can be true with most investments. However, the EIS provides loss relief at your marginal tax rate.
Loss relief gets combined with the income tax relief received by investors when investing in an EIS company. As a result, the amount of the investor’s capital at risk is significantly reduced.
Tax Free Profits
The Enterprise Investment Scheme offers a great incentive for capital gains tax exemption. CGT applies to profits made from most non-EIS investments, over the annual exemption. However, all growth in value from investing in an EIS is exempt, providing all conditions are met.
The scheme allows investors to gain a larger net profit whilst saving their CGT allowance for other investments.
Want to find out more?
If you’re an investor seeking tax advice surrounding the EIS, contact us. Additionally, if your company is making a submission for EIS status, we are here to help.
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