Introduction
Investing into early stage companies may be exhilarating and financial rewards. Despite that, the risks are so intrinsic that many potential investors usually don’t want in. In order to reduce these risks and encourage investment into small, unquoted companies the UK government introduced the Enterprise Investment Scheme (EIS) in 1994.
This particular initiative offers a package of reliefs on tax which would make such investments more attractive. In this article, we will explore what EIS is and how you can use its knowledge to learn about the protection, details, and relevance of exploration technology for your project.
Enterprise Investment Scheme (EIS)
The EIS is a government’s initiative to encourage investments into small, high-risk companies by providing tax reliefs to investors. Between the 2014 to 2015 tax year more than £14.2 billion was invested under the scheme into over 25,000 companies and over £1.8 billion was invested in that year alone.
EIS Key Tax Reliefs Presented.
- Investor Relief from the tax on income: They can claim 30% tax relief in respect of investments limited to £1 million per tax year (effectively reducing their tax liability to £300,000). For investments in ‘knowledge-intensive’ companies, this limit rises to £2 million.
- Capital Gains Tax Deferral: It is possible to defer capital gains from the disposal of other assets, if you reinvest them in EIS qualifying companies. The deferral applies after 1 year before or 3 years after the EIS investment, to gains realized between 12 months before and 36 months after purchasing the EIS investment.
This is to say that EIS gains are generally free of CGT, provided the shares are held for a minimum of three years and initial income tax relief was obtained.
Investment results can give investors loss relief: that is if they make a loss on the investment, it can be offset against another part of their income or capital gains, reducing the amount of the loss to no more than 38.5 per cent of the original investment.
EIS shares are eligible for 100% relief of the inheritance tax if held for at least 2 years and for the time of death, as long as the company in question qualifies for Business Property Relief (BPR).
Qualifying Criteria for EIS
EIS is only available to the company receiving the investment as well as to the investor, if both of these meet the required criteria.
Company Requirements
Size and Structure: The company should have net gross assets not more than £15 million and the number of its full time equivalent employees should not be more than 250.
- Qualifying Trade: It must have a qualifying trade, barring the leather, coal and steel production, the farming, the leasing the monetary services and property development sectors.
- There should be no plans for the company to be listed on a recognized stock exchange at the time of investment and it should not be listed.
- Company limits: It should not have raised more than £12m overall in EIS and other state aid funding, and up to £5m in a year.
Investor Requirements
- Stake Limitation: The investors should not have more than 30% interest in the company.
- Associative Investment: The investor and his associates (including their spouses and relatives) should not have other interest in the company.
The investment should be made with risk to capital and the hope of growth and development of the company.
Practical Example: EIS in Action
Imagine Jane, one of the high-net worth individuals who is hoping to diversify her investment portfolio. She invests £100,000 into an EIS qualifying company.
- Jane can get the benefit of income tax relief: she can claim £30,000 for the sake of the income tax liability for the year that she inherited £100,000.
- Growth Potential: After five years, the value of the company is tripled and Jane’s worth of shares is £300,000. When she sells, she will pay £200,000 of CGT free gain.
This is the amount of loss incurred by Jane if the company operates suboptimally and she sells her shares for £50,000. Her income can serve as offset against this loss which gives further tax relief.
Successful EIS Investment
One of UK’s technology startup Tech Innovators Ltd. sought funding to develop a breakthrough software solution. And so they qualified for EIS and drew in a few investors, including John, who put in £150,000.
- John claimed £45,000 of income tax relief.
- Tech Innovators Ltd: John’s shares in this firm, were trading in excess of £600,000 after four years.
- But John’s £450,000 gain at shares sale was free of CGT (and his net return was similarly boosted).
- EIS can be exemplified in this case.n amplify investment returns while providing substantial tax benefits.fits.
Actionable for Potential Investors
Pay attention to Thorough Due Diligence: Although EIS gives tax benefits EIS is a success based on the company that is intruded. Determine if the company’s business model is sound, whether the market it operates in is large enough, and if the management team is as capable.
EIS investments can be complex, which is why many players turn to consult Financial Advisors. Meeting with financial advisors who know about EIS can assist to pass through the complexities and optimize tax reliefs.
Spread your Investments across several EIS companies: This will help you diversify your investments so as not to lose everything if one loses.
The Tax laws or EIS regulations can change. The continuing compliance and maximum benefit is guaranteed by regular updating.
Conclusion
Its key strength is that it is such a good scheme for investors who want to help growing businesses in the UK and reap huge tax advantages. If investors can understand its mechanisms, follow qualifying criteria, then its financial returns will be able to increase, and in this way the growth of innovative enterprises can be accelerated. Like all investment it’s essential to do full research and seek professional advice on your way to tackling EIS.
These are the dreams of businessmen to make money, the low risk, high return scheme offers an opportunity of substantial tax saving and encourages economic innovation and businesspersonship. But whatever your level of investment experience, if you’re looking for alternative investment options, EIS can be to your advantage in your own ways.
