The Enterprise Investment Scheme (EIS) is a government initiative designed to attract investment into small UK companies. EIS investments provide enterprise capital to small unlisted companies that might otherwise struggle to attract funding. The Government recognises the important role smaller businesses play in a successful economy and offers tax benefits to EIS investors in order to ensure funding is available.
All companies on Deepbridge Syndicate are EIS eligible, unless otherwise stated.
Please note that this guide is by no means exhaustive, and investors should seek advice from a professional tax adviser.
According to figures provided by HM Revenue & Customs (HMRC), as of 2016/17 tax year, 27,905 individual companies have raised investment through the scheme and over £18 billion of funds have been raised since the scheme was introduced in 1993-94.
HMRC data for the 2016/17 tax year shows that 3,470 companies raised a total of £1,797 million via EIS. See full statistics.
What Companies qualify for EIS?
HMRC sets prescriptive EIS qualification criteria for companies:
- The company must be established in the UK
- Any investment must be purchasing new shares (rather than acquiring existing shares);
- The company must have fewer than 250 employees at the time the shares are issued
- The company has gross assets of £15m or less before investment (or £16m after investment)
- EIS investment in a singular company does not exceed £5m in any one year
- The company must use the investment within 24 months, or if later, the date they started trading
- The company cannot be controlled by another company
- A number of excluded industry sectors, predominantly in and around financial services and property.
For more information on how the scheme works please visit: https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme#companies-that-can-use-the-scheme
EIS tax reliefs for investors
Investors may become eligible for potential tax benefits available through EIS as long as the investment is held for a minimum of three years, unless otherwise stated. This is for guidance only. For advice regarding the below tax reliefs, investors should contact their financial or taxation adviser:
30% upfront income tax relief
Deepbridge EIS investors may claim up to 30% income tax relief, provided the qualifying investment is held for at least three years. With a maximum investment of £1m per tax year, investors can claim up to £300,000 for the current tax year and invest a future £1m carry back to the previous tax year and claim up to £300,000 against their income tax liability for that previous year, as long as the amount of tax relief claimed is not more than the income tax paid in any one tax year.
If a Deepbridge EIS investment increases in value, there is no capital gains tax (CGT) to be paid.
100% inheritance tax relief after two years
As Deepbridge EIS shares are eligible for Business Relief (BR), there is no inheritance tax payable if held by the investor for at least two years and they are still held at the time of death.
100% capital gains tax deferral
Any taxable capital gain (from thirty six months before an EIS investment or twelve months after) can be invested in a Deepbridge EIS qualifying company and the CGT will be deferred for the duration that investment is held. If the investment is still held when the investor dies the deferred tax is eliminated.
Although it is hoped that shares in the underlying investee companies within a Deepbridge EIS do not fall in value (Deepbridge EISs are designed to generate growth, rather than to maximise loss relief), investments can go down as well as up and investors may not get back the full amount invested. Losses from individual EIS investments can be mitigated as loss relief is available on each individual holding. So, investors can claim loss relief if shares in one company fall in value, even if the other shares in the investor’s EIS portfolio increase in value. Investors can set loss relief against CGT or income tax, depending which is the most beneficial for their personal circumstances.
Worked Example: Based on a higher rate (45%) taxpayer investing £10,000
|SITUATION 1||SITUATION 2||SITUATION 3|
|Company doubles its value and shares are held for 3 years||Company value stays the same||Company closes and shares are worth nothing|
|Income Tax Relief||£3,000||£3,000||£3,000|
|Capital Gains Tax||£Zero||£Zero||£Zero|
|Your Gain (including EIS income tax relief)||£13,000 (£10,000 profit plus £3,000 income tax relief)||£3,000 (from the income tax relief)||£3,000 (from the income tax relief)|
|At Risk Capital (after EIS income tax relief)||£7,000|
|EIS Loss Relief (based on higher rate 45% income tax payer)||Loss relief (set off against income) on at risk capital @ 45% = £3,150|
|Your Actual Loss||£3,850 (£10,000 – [£3,000 + £3,150])|
The above tax advantages can only be claimed at the time when the investment is made, and the investor is in receipt of the tax certificates, rather than when an investor makes an initial pledge via Deepbridge Syndicate.
Need to know more?
For further information please do not hesitate to get in touch.