6 facts you might not know about EIS tax advantages
From 30% income tax relief to capital gains tax exemption and inheritance tax relief, the Enterprise Investment Scheme is renowned for the long list of EIS tax reliefs it offers individuals keen to invest in early stage companies. Consequently, in this piece I wanted to share six facts that you might not know about EIS tax advantages.
1. There's indefinite capital gains deferral
As we start a new tax year, one important tax benefit offered when investing into EIS eligible companies is the Capital Gain Tax deferral.
For investors who have made a capital gain in the 2021/22 tax year, they are able to invest in an EIS eligible company and defer this gain until the shares are sold, taking advantage of the capital gains tax liability in that year. This allows investors to use the potential tax free gain made from the investment to settle the tax liability while also benefiting from any changes in capital gains allowance changes.
Importantly, the capital gains deferral is not limited based on where the capital gain liability arose, be it from property, sale of shares or even sale of fine art. Therefore when the liability becomes due again after disposing of the shares it is possible to reinvest once more and defer the liability a second time. This process can be repeated indefinitely, meaning the capital gains tax liability can be continually deferred by reinvesting the initial investment while benefiting from the capital gains exempt growth achieved from the EIS investments.
2. Any future losses can be offset against your income
In the case that these investments do not perform as hoped, the EIS allows you to offset this loss against your tax bill. This loss can be offset against either capital gains tax or income tax. Given the way this is calculated, it is most often used against income tax in the current or preceding year, but this loss can be carried forward to offset against future gains.
The loss is calculated as the net loss on the investment, so the investment is counted as the amount less any other reliefs claimed. The relief then given is at the rate of tax which is being set against - 28% for CGT, or the marginal rate for income tax (20% for basic rate, 40% for higher rate and 45% for additional rate taxpayers). This means that for an additional rate taxpayer the exposure can be as little as 38.5% if the investment value goes to zero.
3. All investments are IHT exempt
Many people invest to plan for the future, whether this is investing into a pension scheme for retirement or taking care of family into the future. One key aspect of this planning is regarding Inheritance Tax, and this is where EIS eligible shares can be very useful, marking a crucial difference between EIS investments and Venture Capital Trusts, the latter of which are not IHT exempt.
Once the shares from an EIS investment have been held for two years, they can be passed onto future generations free of inheritance tax, making a potential saving of 40% on this holding. This is a far shorter time than the 7 year limit usually applied when making a gift, and even less than the 3 years you need to hold the EIS shares for to benefit from other reliefs.
4. Tax reliefs can be carried back
Given the time of year, many people are realising their tax liability for 2017/18 and are wishing they did more with their money in the year. Luckily, with EIS, the previous tax year is not set in stone.
For instance, the 30% income tax relief offered on EIS eligible shares can be used in the current tax year - but they can also be carried back and treated as if the investment had taken place in the previous year, reducing the tax liability for 2017/18.
Similarly, the capital gains deferral can be used on any capital gain liability that has arisen in the previous three years before the investment, meaning at present you can reach all the way back to the 2018/19 tax year and defer that tax liability.
The capital gains deferral can also be used on a future gain up to a year in the future, allowing you to plan ahead if you know you will be making an investment in the next year.
5. You can invest over £1m in a year
It is often the headline that you can invest up to £1 million in EIS investment opportunities every year, and this is usually the case. However, with recent changes, investment into knowledge intensive companies under the EIS allow an investor to invest up to £2 million in a single year, allowing £600,000 to be claimed back in income tax relief (provided enough tax has been paid in the year).
This is allowed as long as the additional £1 million invested goes to these companies that are spending on innovation or research and development, and importantly the initial £1 million can still be invested into any EIS eligible business.
This, along with the ability to treat the investment as if it happened a year earlier, means investors can theoretically reach a total of £3 million of investment and £900,000 of tax relief. This gives the investor the flexibility to invest and take their reliefs in the way that is most beneficial to themselves depending on their personal circumstances and liabilities.
6. EIS tax advantages are available to all UK taxpayers
In my opinion, the best thing about EIS tax advantages is that as long as you have paid income tax in the UK, you are able to claim them once you invest. The only condition on the amount that can be claimed is that you need to have paid sufficient tax in the year claimed to cover the amount of relief being provided (you can still invest more, but you will not be able to claim further relief).
Likewise, if you do not pay tax in the UK, you can still invest in EIS eligible companies, but you would not be able to claim any reliefs. However, depending on where you are investing from you may be limited by which platforms and vehicles you can invest through.
Investing under the EIS
With the EIS tax advantages particularly generous, it's no real surprise that the scheme has been growing in popularity since its inception in the 1993/94 tax year. Allowing you to back the next generation of British businesses, we're passionate about the scheme and really do believe it can be extremely beneficial for investors and entrepreneurs alike.