What is the EIS: Enterprise Investment Scheme June 14, 2019 13:28

If you invest in Snaffling Pig there is a very generous tax break. Ladies and gents, welcome to the world of EIS – Enterprise Investment Scheme which can also be 'carried back' to the previous tax year.

We've tried to explain it as best we can below but as with any investment decision, you should obtain independent tax advice before proceeding with your investment. Investments of this nature carry risks to your capital. Please Invest Aware.

EIS – Enterprise Investment Scheme

People can invest up to £1,000,000 in any tax year and receive 30% tax relief. However, they are locked into the scheme for a minimum of three years. What makes it even more attactive is the 'carry back' facility where investments can be applied to the preceding tax year..

What tax reliefs available

1. Income Tax Relief

There is no minimum investment through EIS in any one company in any one tax year. Tax relief of 30% can be claimed on investments (up to £1,000,000 in one tax year) giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it.

EIS allowances are allocated individually; therefore a married couple could invest up to £2 million each tax year and be eligible for Income tax relief. The shares must be held for at least three years from the date of issue or the tax relief will be withdrawn. 

2. Capital Gains Tax exemption (CGT)

Any gain is CGT free if the shares are held for at least three years and the income tax relief was claimed on them. Shares can be held for much longer and therefore potentially enable the investor to be accrue their CGT exemption over a long period of time which can be a great attraction.

3. Loss relief

If shares are disposed of at a loss, the investor can elect that the amount of the loss, less Income Tax relief given, can be set against income of the year in which they were disposed or, on income of the previous year instead of being set of against any capital gains.

4. Capital Gains Tax deferral relief

Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company. The gain can be made from the disposal of any kind of asset but the Investment must be made one year before or three years after the gain arose - connection to company does not matter. Unconnected investors are eligible for relief from both Income tax and CGT referral relief.

Carry Back

There is a 'carry back' facility which allows the all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year. Relief is then given against the Income Tax liability of that preceding year rather than against the tax year in which those shares were acquired. This is subject to the overriding limit for relief for each year. For more information, please see the HMRC website.

Examples

Here’s a few examples of how EIS tax relief works. To make the maths easy, let’s assume you invest £10,000 in Snaffling Pig and you’re in the 45% tax bracket.

Case 1: The company does well and doubles its value and you hold the shares for three years

Investment = £10,000

Income Tax relief = £3,000 (as a reduction in your income tax bill)

Capital Gains Tax = £Zero

Rewards = Investing £10,000 into Snaffling Pig and you will get over £600 of exclusive discounts, including our Pig Bluey BBQ, dinners and 25% discount on our site.

Your gain = £13,600 (£10,000 profit from the sale plus £3,000 income tax relief + £600 of discounts)

 

Case 2: The company value stays the same

Investment = £10,000

Income Tax relief = £3,000 (as a reduction in your income tax bill)

Share sales = £10,000

Rewards = Investing £10,000 into Snaffling Pig and you will get over £600 of exclusive discounts, including our Pig Bluey BBQ, dinners and 25% discount on our site.

Your gain = £3,600 (from the income tax relief)

Case 3: The company closes and your shares are worth nothing

Investment = £10,000

Income Tax relief = £3,000 (as a reduction in your income tax bill)

At risk capital = £7,000

Loss relief on at risk capital @ 45% = £3,150

Rewards = Investing £10,000 into Snaffling Pig and you will get over £600 of exclusive discounts, including our Pig Bluey BBQ, dinners and 25% discount on our site.

Your actual loss = £3,250 (£10,000 – [£3,000 + £3,150] - £600 exclusive discounts)

 

PLEASE NOTE: The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment.

Investments of this nature carry risks to your capital. Please Invest Aware.