Income Tax Relief
Individuals can claim income tax relief of up to 30% of the amount subscribed for EIS-qualifying shares*.
The maximum investment in EIS qualifying companies which qualifies for EIS Income Tax Relief is £1 million in a tax year (or up to £2 million into Knowledge Intensive Companies) , and the income tax relief is restricted to the amount that reduces the individual’s income tax liability to nil.
EIS investments made at any time within a single tax year may be carried back and treated as if they were invested in the previous tax year, subject to the maximum EIS tax relief available for that year.
*Some or all of the income tax relief obtained may be withdrawn if, during the Three Year Period, the shares are sold or otherwise disposed of, or the Investee Company loses its EIS-qualifying status.
Capital Gains Tax Deferral
An Investor with a taxable capital gain from the disposal of any asset can reinvest the chargeable gain in EIS qualifying shares and claim for the gain (and so the tax payable on that gain) to be deferred. The gain can be deferred until the shares are disposed of or qualifying conditions cease to be satisfied (although it may be possible to defer the gain again under certain circumstances).
To benefit from this deferral relief, the Investor must have been resident (or in certain circumstances ordinarily resident) in the UK both at the time when the chargeable gain on the disposal of the assets occurred and at the time of making the reinvestment.
The investment limits that apply to EIS income tax relief do not apply to deferral relief so relief can be applied to any amount invested in EIS-qualifying shares.
To qualify for Capital Gains Tax deferral relief, the EIS-qualifying investment must be made within either one year before, or three years after the date the gain to be deferred originally arose.
Tax-Free Capital Gains
Any capital gains made on the disposal of EIS-qualifying shares (where EIS income tax relief has been given and not withdrawn) are tax-free, provided that the EIS-qualifying shares have been held for three years. Where EIS income tax relief is withdrawn, or the shares are disposed of within the three years, then any capital gains arising will be chargeable gains and will be subject to capital gains tax in the normal way.
Capital losses incurred from an investment in EIS-qualifying shares may qualify for loss relief (net of initial income tax relief). Losses arising on disposal of shares where income tax relief has been claimed, and retained, will continue to be eligible for uncapped offset against income tax of the year of loss, or income tax of the last preceding year on making a claim. Alternatively, as with all capital losses, they can be offset against capital gains of the same year or carried forward indefinitely.
Loss relief can reduce an investor’s exposure to 38.5% of the original capital invested if the investor elects to set the loss off against income tax due (assuming the investor pays income tax at a marginal rate of 45%).
Inheritance Tax Relief
Each underlying investment should qualify for Business Property Relief (BPR). In the event of the death of the Investor, as long as the Investor has held the investment for at least two years prior to death, the investment should fall outside your taxable estate.
Where an investment in Relevant Business Property is made as a replacement of Relevant Business Property previously sold, provided the combined periods of ownership (ignoring any period between the sale and replacement) amount to more than two years out of the five years immediately prior to death, the replacement property should likewise qualify for full relief from Inheritance Tax.
For example, if shares in an unquoted Investee Company, qualifying as Relevant Business Property, were purchased and held for one year and then sold – and all the resulting cash held for two and a half years before being reinvested in shares in another unquoted Investee Company (or any other asset) qualifying as Relevant Business Property – that further investment would qualify for IHT relief were the Investor to die at least one year after the reinvestment.
Tax reliefs will depend on investors’ individual circumstance and are subject to change.
Investments into an EIS must be retained for a minimum of three years in order to retain the upfront income tax relief. Tax rules and regulations are subject to change and EIS tax reliefs depend on investee companies maintaining their qualifying status. Please refer to the HM Revenue and Customs website for further guidance on the tax reliefs available on EIS investments.