EIS Company InvestmentWritten on January 24, 2019 by Kirk Rice LLP
The Question:
I have been offered the opportunity to invest in a company. It is quite high risk, but I have been told that I can get some tax back on my investment because it is an EIS company. Is that correct?
Kirk Rice LLP answers:
EIS stands for ‘Enterprise Investment Scheme’ and the purpose of the scheme is to help certain types of small higher-risk unquoted trading companies to raise capital. It does so by providing income tax and capital gains tax (CGT) reliefs for investors in qualifying shares in these companies.
An investor may be given income tax relief at 30% on their investments of up to £1,000,000 per year (this limit is increased to £2m for companies qualifying as ‘knowledge intensive’). The income tax relief is withdrawn if the shares are disposed of within three years. Relief cannot be given where, at the time of an investment, certain exit arrangements are in place which guarantee the investor a way of disposing of the shares at a later date, effectively turning the whole investment into a low-risk venture. Broadly, relief is denied where the terms of the issue include, or there already exist at the time of issue, arrangements for repurchasing or exchanging the shares, ceasing the trade, disposing of assets of the company or otherwise providing some form of protection or guarantee for the investor.
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EIS relief must be claimed. In general, an investor is not eligible for relief unless, and until, the company’s qualifying trade has been carried on for four months. The issuing company must give to HMRC a statement in respect of the issue of shares (a ‘compliance statement’ EIS 1), to the effect that it satisfies the conditions for relief so far as they apply in relation to the company and its trade, and has done so since the share issue.
Once HMRC has examined the compliance statement, they may authorise the company to issue a certificate (a ‘compliance certificate’ EIS 3) to investors. This certifies that the conditions for relief, so far as applying to the company and the trade, are satisfied in relation to those shares. The investors may then claim the appropriate tax relief.
Capital gains on the disposal of EIS shares are exempt unless the income tax relief is withdrawn. It should also be noted that the CGT exemption may be restricted if the investor does not get full income tax relief on the subscription for EIS shares.
Separately a CGT deferral is also possible following an investment in EIS shares. Capital gains arising on any assets can be deferred against subscriptions for shares in any EIS company. The gain deferred will become chargeable in the tax year when the subscription shares are disposed of.
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If you would like more advice regarding investing in an EIS company any other tax matter, please email info@kirkrice.co.uk and one of our Tax Partners will get in touch.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The FCA does not regulate tax and trust advice.
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