The EIS is a UK government scheme that allows certain tax reliefs for investors who subscribe for qualifying shares in qualifying companies.
It is a major incentive to Angel Investors to give you “their” money – the reason is that the UK government allows them to invest the taxable portion of the amount invested – thats means in simple terms that they can get a 40% discount in deferred tax payable.
Instead of paying £40K out of the £100K invested to the UK government in tax they give it to you, if the business fails they get to write of some of the losses and if it does well after three years the taxable gains are tax free!
This is a complex area and only some types of investments are covered so do your homework to understand this legislation as it’s very important to all UK entrepreneurs and angels. More details are at the end of this blog.
There are five EIS tax reliefs:
– An individual with no more than a 30% interest in the company can reduce his income tax liability by an amount equal to 20% of his share subscription. The minimum subscription is £500 per company and the maximum per investor is £200,000 per annum.
– Deferral of gains realised on a different asset, where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it. (Deferral relief). This relief is not limited to investments of £200,000 per annum and can be claimed by investors whose interest in the company exceeds 30%. It is available to individuals and trustees. Where gains arise on the EIS investment, taper relief is available. Note that deferral of gains is no longer available by investing in VCTs.
– No Capital Gains Tax payable on disposal of shares after three years (after five years for investments made before 6th April 2000) provided the EIS initial income tax relief was given and not withdrawn on those shares.
– If EIS shares are disposed of at any time at a loss, such loss can be set against the investor’s capital gains or his income in the year of disposal.
– EIS Investments are exempt from Inheritance Tax after two years of holding such investment.
- EIS is appropriate for those investors who wish to include in their portfolio some high risk companies.
- Shares in such companies are likely to attract a 100% business property deduction for inheritance tax purposes.
- An investor can benefit from capital gains taper relief by sequentially investing in unquoted companies.
For the latest information visit the website: http://www.hmrc.gov.uk/eis/eis-index.htm it will pay you to fully understand this scheme as it is the major incentive to angel investors to buy into companies needing seed capital as it offers them upto 60% lower costs in buying your shares!