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EIS investment tax relief: exactly how can you benefit as an investor?
The Enterprise Investment Scheme (EIS) is one of the most advantageous schemes currently available in the UK that both investees and investors can participate in.
From an investee's point of view, EIS provides the opportunity to raise funds in a way that is particularly appealing to investors, generally by providing a number of generous tax reliefs.
And from an investor's point of view, it's exactly these tax reliefs that are genuinely appealing.
Broken down into five separate areas, most investors will be able to benefit from, at the very least, one of the tax reliefs - but it's not unrealistic to benefit from three or four of the five.
Direct EIS investment tax reliefs
By investing into EIS-eligible opportunities, the five tax reliefs available to benefit from are:
- Income tax relief
- Capital gains tax (CGT) relief
- Capital gains tax (CGT) deferral relief
- Loss relief against income or capital gains
- Inheritance Tax (IHT) relief
We talk about each in more depth on our EIS investment tax reliefs page, but it's immediately clear from the titles above that the cost of making an investment into an EIS-eligible opportunity could reduce considerably when the tax reliefs are taken into account.
Looking at those which have the ability to offer immediate tax reliefs first, let's use a £1,000 investment as an example.
On the assumption you have sufficient earnings to warrant paying income tax, you can immediately take 30% off your investment in income tax relief, bringing the effective cost of your investment down to £700.
If the worst happens and the company you have invested in folds, you can then claim a further 20% to 45% (depending on your tax bracket) in loss relief on your original investment after the 30% income tax relief has been taken off.
If we assume you're an additional rate tax payer, you'd therefore be entitled to 45% in loss relief on the £700 remaining of your original investment.
At £315, this brings your original investment value down to just £385.
Secondary tax benefits
With income tax relief and loss relief accounting for two of the five investor benefits of EIS, the three that remain - capital gains tax (CGT) relief, capital gains tax (CGT) deferral relief and Inheritance Tax (IHT) relief - can be just as valuable.
Exploring the CGT benefits firstly, on the assumption shares are held for a minimum of three years, no Capital Gains Tax (CGT) is payable.
What's more, capital gains tax deferral relief is available for qualifying UK investors who may have realised gains over the last 36 months, or are anticipating gains over the 12 months following investment.
This relief gives individuals the ability to defer any CGT gain as long as they invest it into an EIS eligible opportunity.
Now with IHT, the clear message here is that EIS investments are not liable for Inheritance Tax.
With IHT taxing everything upon your death above the £325,000 threshold (with some additions - an extra £100,000 if the estate includes a main home, for example), it quickly becomes clear how valuable investing in EIS can be - not only can you gain immediate relief on income tax, but you can protect your investment assets from being taxed further, supporting your long term investment strategy.
Restrictions and considerations
Now the above is a very high level view, and there are numerous restrictions and considerations to take into account.
For example, to qualify for income tax relief:
- You must not be deemed connected with the company; generally speaking, this means not owning (or having owned in the previous two years) 30% or more of the company or be an employee of the company
- You hold the shares for three years from the date of issue or from commencement of trading whichever is the later
- You have paid sufficient income tax against which to claim tax relief. You can combine income tax paid in the current and previous financial year and claim relief below or up to this amount.
Additionally, investments only become IHT free once they have been held for two years, and you must claim income tax relief to qualify for the other tax incentives.
But for the most part, the majority of investors into EIS opportunities meet such stipulations by default (i.e. they're not focused on short-term returns, they're investment level is likely to be vaguely proportionate to their income, and they're not a key figure internally within the company).
It's clear that as an investor, the potential to benefit from the Enterprise Investment Scheme is considerable.
From saving money on your income tax relief through to being able to invest confidently in the knowledge any gains won't be subject to capital gains tax, EIS really does provide some of the most generous tax reliefs available in the UK.