Enterprise Investment Schemes
Enterprise Investment Schemes (EISs) are a tax-efficient investment product available to UK investors. They are particularly suited to those looking to defer capital gains or reduce potential inheritance tax.
There are currently five tax reliefs available: Income Tax, CGT deferral, CGT exemption, loss relief and inheritance tax.
Income Tax relief:
- Available only to individuals who are not connected with the company;
- Potential relief of 30% on investments up to £1 million;
- Shares must be held for three years to retain the relief;
- There is a facility to carry back up to 100% of the investment to the previous tax year, subject to the annual limit not being exceeded;
- Maximum tax relief is based on the lower limits and the investor’s actual income tax liability in the tax year in which the investment is treated as being made (i.e. either current year or previous year if carried back).
CGT Deferral relief:
- Available to some trustees as well as individuals (individuals may be connected to the company);
- CGT on gains made on disposal of any assets (unlimited amount) can be deferred if the gains are re-invested into an EIS (the EIS investment must be made within the period 1 year before and 3 years after the disposal to which the deferred CGT relates);
- Deferred gains are brought back into account when the EIS shares are disposed of (but not on death);
- There is no minimum term for which the EIS must be held for the purposes of CGT deferral relief.
- No CGT is payable on the disposal of the shares as long as: the investor received income tax relief on the shares that haven’t been withdrawn, and the shares have been held for at least three years.
- Losses made on the disposal of shares in an EIS (less income tax relief received) can be offset against income in the year of disposal or the previous year instead of against capital gains (if required).
- EIS shares will usually (initially) qualify for 100% Business Property Relief
- This effectively provides complete exemption from IHT for the value of shares in an unquoted trading company
- The shares must have been held for at least two years prior to the chargeable lifetime transfer or death.
- If shares in a company qualify for EIS relief they will also qualify for BPR.
- However, availability of this relief cannot be guaranteed because the conditions to qualify for EIS relief need only be satisfied for three years, so an EIS company may change and become one that does not qualify for BPR.
While we would generally consider these investments appropriate for sophisticated investors who wish to include some high-risk companies and funds within their overall portfolio, we would advise speaking with our expert team at TR Wealth to work out the best options for you.
As it is possible to lose all capital invested and tax relief benefits of an EIS, this type of investment is not suitable for more cautious or cautious/balanced investors. Please note that advance assurance of these ‘tax advantages’ by HMRC is granted on the basis of the information provided. Any inaccuracies in this information could prejudice the reliefs available, therefore we recommend always seeking suitably qualified advice.