The Enterprise Investment Scheme

Through the Enterprise Investment Scheme (EIS) eligible investors can claim up to 30% income tax relief on investments up to £1 million per tax year.

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are UK government schemes designed to help smaller higher-risk trading companies raise finance, by offering a range of tax relief to investors who purchase new shares in those companies. Where a business is listed as 'EIS' or 'SEIS' on Crowdcube, this tax relief will be available to qualifying investors.

The benefits of EIS tax relief

You can claim up to 30% income tax relief on investments up to £1 million per tax year.

Any gain is Capital Gains Tax (CGT) free if the shares are held for at least three years.

Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company.

If the shares are disposed of at a loss you can elect that the amount of loss be set against any income tax of that year or of the previous year.

Tax reliefs available:

1. Income Tax Relief

There is no minimum investment through EIS in any one company in any one tax year. Tax relief of 30% can be claimed on investments (up to £1,000,000 in one tax year) giving a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it.

EIS allowances are allocated individually; therefore a married couple could invest up to £2 million each tax year and be eligible for Income tax relief. The shares must be held for at least three years from the date of issue or the tax relief will be withdrawn.

People connected with the company are not eligible for Income Tax Relief on their shares.

2. Capital Gains Tax exemption (CGT)

Any gain is CGT free if the shares are held for at least three years and the income tax relief was claimed on them. Shares can be held for much longer and therefore potentially enable the investor to be accrue their CGT exemption over a long period of time which can be a great attraction.

3. Loss relief

If shares are disposed of at a loss, the investor can elect that the amount of the loss, less Income Tax relief given, can be set against income of the year in which they were disposed or, on income of the previous year instead of being set of against any capital gains.

4. Capital Gains Tax deferral relief

Payment of CGT can be deferred when the gain is invested in shares of an EIS qualifying company. The gain can be made from the disposal of any kind of asset but the Investment must be made one year before or three years after the gain arose - connection to company does not matter. Unconnected investors are eligible for relief from both Income tax and CGT referral relief.

Carry Back

There is a 'carry back' facility which allows the all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year. Relief is then given against the Income Tax liability of that preceding year rather than against the tax year in which those shares were acquired. This is subject to the overriding limit for relief for each year.

For more information, please see the HMRC website.

Restrictions

Connection to the company

Should the investor be connected to the company, they are not eligible for Income Tax Relief. Connections are defined through financial interest or employment.

Connection by financial interest

An individual is connected with the company if they control the company or hold more than 30% of the share capital or voting rights. These conditions apply for up to 2 years before and 3 years after the share issue. If during this time, the individual becomes connected, then the relief will be withdrawn. All relatives except brothers and sisters are included within these restrictions.

Connection by employment

Partners, directors and employees of the company are all connected with it and therefore not eligible, as are associates. Associates are business partners, trustees and relatives. Again, these conditions apply for up to 2 years before and 3 years after the share issue.

The only exceptions are Business Angels – where the connection is as a director who receives no remuneration from the company.

Claiming your tax relief

The investor can only claim relief once the company sends through an EIS3 form. Claims are made through the Self-Assessment tax return for the tax year in which the shares were issued.

Claims can be made up to five years after the investment after the first 31 January following tax year in which investment was made.

Tax relief that is reduced or withdrawn

Tax relief will be withdrawn if you become connected to the company or if the company loses its qualifying status.

The relief will be either reduced or withdrawn if the Shares are disposed of or if the investor receives “value” from the company such as a loan or an asset below market value.

Examples

Here’s a few examples of how EIS tax relief works. To make the maths easy, let’s assume you invest £10,000 in each case and you’re in the 45% tax bracket.

Case 1:

The company does well and doubles its value and you hold the shares for three years

Investment = £10,000

Income Tax relief = £3,000 (as a reduction in your income tax bill)

Capital Gains Tax = £Zero

Your gain = £13,000 (£10,000 profit from the sale plus £3,000 income tax relief)

Case 2:

The company value stays the same

Investment = £10,000

Income Tax relief = £3,000 (as a reduction in your income tax bill)

Share sales = £10,000

Your gain = £3,000 (from the income tax relief)

Case 3:

The company closes and your shares are worth nothing

Investment = £10,000

Income Tax relief = £3,000 (as a reduction in your income tax bill)

At risk capital = £7,000

Loss relief on at risk capital @ 45% = £3,150

Your actual loss = £3,850 (£10,000 – [£3,000 + £3,150])

Please note:

The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment.

Please visit the HMRC website for further information on EIS tax relief.

Risk warning

Investing in start-ups and early stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. Crowdcube is targeted exclusively at investors who are sufficiently sophisticated to understand these risks and make their own investment decisions. You will only be able to invest via Crowdcube once you are registered as sufficiently sophisticated. Please click here to read the full Risk Warning.

This page is approved as a financial promotion by Crowdcube Capital Limited, which is authorised and regulated by the Financial Conduct Authority. Pitches for investment are not offers to the public and investments can only be made by members of crowdcube.com on the basis of information provided in the pitches by the companies concerned. Crowdcube takes no responsibility for this information or for any recommendations or opinions made by the companies.