When can EIS relief be claimed? What are the conditions for EIS relief? What are the benefits of EIS relief?
Subscribers see our extended guide EIS: Enterprise Investment Scheme (subscriber guide).
This is a freeview 'At a glance' guide to the Enterprise Investment Scheme (EIS).
At a glance
The Enterprise Investment Scheme (EIS) provides tax incentives in the form of a variety of Income Tax and Capital Gains Tax (CGT) reliefs to investors who invest in smaller, unquoted, trading companies.
- Income Tax relief is given at 30% on the cost of new EIS share investments.
- No CGT charged on any gain of EIS shares disposed of after the minimum holding period on which Income Tax relief was given and not withdrawn.
- CGT on the disposal of other assets can be deferred if capital proceeds are invested in EIS shares
- There is no minimum amount an investor can invest in any one company.
- The a maximum investment is £1 million from 2012-13 or for investments made or after 6 April 2018, £2m provided at least £1 million is invested in Knowledge Intensive Companies (KICs).
- The maximum amount of investment that a qualifying company can receive in any given twelve months is limited to £5 million. From 6 April 2018, this limit is £10m for KICs.
The Finance Act 2012 introduced the Seed Enterprise Investment Scheme (SEIS): a scheme like EIS but for start-ups.
There are a number of potential tax reliefs associated with EIS.
Income Tax relief
- Individuals who subscribe for shares in an EIS qualifying company will receive tax relief of 30% on the cost of the shares, which is offset against the individual’s Income Tax liability for the year in which the investment was made.
- It is possible to ‘carry back’ all or part of the investment to the preceding tax year as long as the limit for relief is not exceeded for that year.
- An individual may carry back current year EIS investments to the previous year, provided that the limit in the previous year is not exceeded. For example, a subscription of say, £2 million non-KIC EIS shares may be made in 2021-22 with a carryback of £1 million to 2020-21.
An individual is able to reduce their tax liability to zero through EIS relief, allowing the taxpayer to claim back any repayable tax deducted at source, such as bank interest or Pay-As-You-Earn (PAYE).
Note that there are several important qualifying conditions attached with EIS Income Tax relief.
1. Restriction for connected individuals
Between the period commencing two years before the issue of EIS shares, and the later of three years after the investment was made and the date the company commences trading, an individual investor cannot be ‘connected’ with the qualifying EIS company. They cannot:
- Be remunerated as a company employee, partner, or director, unless an unremunerated director, or potentially a paid ‘business angel’ investor, or
- Directly or indirectly* possess or be entitled to acquire more than 30% or the company's (or any subsidiary's):
- Ordinary share capital.
- Voting rights.
- Rights to assets on a winding-up.
*The rights of an individual’s associates are attributed to the individual for the 30% test.
These rules are subject to exceptions for unpaid directors and paid business angel investors which broadly permit payment for services as a director once the shares have been issued. It is advisable to become a director only once shares have been issued. Any director involved in the company's trade prior to issue is likely to be 'connected' and relief will be denied.
2. Three year holding period
The individual must retain the shares for a minimum of three years (or up to five if the trade commenced after the share issue date). If the shares are disposed of within this minimum holding period, the relief will be clawed back, unless the disposal was to a spouse or civil partner, in which case the spouse or civil partner is deemed to have subscribed for them. See note on ‘Relief Clawback.’
3. Investing via partnerships
Investors who invest in start-ups or other small companies through a partnership structure are not eligible for EIS relief.
Capital Gains Tax exemption
- There will be no CGT charged on any gain of EIS shares disposed after the minimum holding period on which Income Tax relief was given and not withdrawn.
Capital Gains Tax deferral
- CGT can be deferred if capital proceeds are invested in EIS shares, even if the investor is connected (see above). The gain can be realised from any asset but the share investment must take place in the period of one year before or three years after the disposal of the asset. The minimum or maximum EIS investments do not apply to deferral relief.
- Gains realised on or after 3 December 2014 which qualified for Business Asset Disposal Relief (BADR) may be reinvested in EIS (or Social Investment Tax Relief) and will still remain eligible for BADR when the deferred gain is realised.
- It is important to claim BADR the first time that any part of the deferred gain comes back into charge. If relief is not claimed on the first part of the gain to be realised then it cannot be claimed later in respect of any of the remaining gain. See Business Asset Disposal Relief (BADR).
- If EIS shares are disposed of at a loss at any time, the loss (after any Income Tax relief has been taken into account) can be offset against income for that year and the previous year instead of being offset against capital gains.
The clawback of relief works in one of several ways depending on the nature of the disposal.
- Where the individual gifts the shares within three years, all of the original relief obtained will be withdrawn and an assessment made in respect of the relief given.
- Where the individual sells the shares within three years for a profit, again the original relief obtained will be withdrawn and an assessment made in respect of the relief given.
- Where the individual sells the shares for a loss the relief clawed back will be the proceeds of the sale multiplied by 30%.
To qualify for the EIS scheme companies must fulfil certain criteria. The issuing company must be:
- A Qualifying trading company or the parent of a trading group: most trades qualify but ‘excluded activities’ include property development, farming and market gardening, coal and steel production, hotel and nursing home operation and management and many financial activities. From 6 April 2015 the list includes subsidised generation of electricity involving a) contracts for difference or b) renewable sources where anaerobic or hydroelectric power is involved.
- Unquoted at the time of the share issue. This means the company cannot be listed on the London Stock Exchange or any other recognised stock exchange. The Alternative Investment Market (AIM) is not treated as a recognised market under EIS rules.
- A ‘small company’. Gross assets cannot exceed £15 million before the share issue, or £16 million immediately after.
- A company that employs fewer than 250 full-time employees at the time of the share issue.
- Carrying out the trade for which the money was raised for at least four months before an investor is eligible for EIS relief.
For more detail on qualifying company conditions, see EIS: Enterprise Investment Scheme.
Where a company is a Knowledge-Intensive Company, some of these limits and conditions are relaxed.
EIS, takeovers and management buy-outs
In the past, HMRC held the general view that a management buyout cannot qualify for EIS relief due to the prior involvement of the acquiring managers in the trade whose ownership is transferred in the buyout. A recent case indicates that there may be ways around this, see EIS (Subscriber Guide).
Section 247 ITA 2007 provides continuity of EIS relief when an issuing company is acquired by a new company, provided that all the qualifying conditions are met.
All money raised by the issue of relevant shares must be employed wholly for the purpose of the qualifying business activity within a time limit of two years, see EIS (Subscriber Guide) for recent case decisions.
Small print and links
The rules on EIS are found in Part 5 of the 2007 Income Tax Act. It is worth the read; many claims to EIS relief fail on what might outwardly appear to be minor technical issues.
The EIS is administered by HMRC’s Venture Capital Reliefs Team
Venture Capital Reliefs Team
HM Revenue and Customs