The EIS (Enterprise Investment Scheme) income tax relief scheme is a hotly talked about topic.
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What is the EIS tax relief scheme?
EIS stands for the Enterprise Investment Scheme, and it’s been set up to help small businesses gain the funds they need to keep themselves afloat.
These businesses need to reside in the UK, not be on the stock exchange, and can’t control any other company.
It’s a scheme that’s mainly aimed at helping small to medium-sized businesses that aren’t widely recognised.
EIS income tax relief scheme is relatively simple.
Individual investors are allowed to invest in company shares, and they get the benefit of various tax reliefs.
You can invest up to £1 million pounds per year, and can only hold up to 30% of the shares in any given company.
As far as the tax relief goes, an individual can reduce their income tax reliability by up to 30% of the amount they’ve invested in a qualifying company.
This means investors can make considerable savings throughout the course of their investment.
What about capital gains tax on investments?
Usually, investors have to pay capital gains tax when they sell shares for a profit over the yearly allowance of £11,700.
However, one of the major benefits of the EIS income tax relief scheme is that you can be completely exempt from paying capital gains tax on these shares.
If you’ve held the shares for three years or more, and you’ve claimed the income tax relief on them, then you can sell them for a profit that’s free from CGT.
There’s no limit for how long you have to hold the shares before selling them, meaning you can keep hold of them for a number of years before taking advantage of your tax exemption.
What are the main EIS rules?
Understandably, there are a few rules to consider if you’re interested in this scheme.
First of all, there’s a maximum investment allowance of £1 million per year.
You can claim the full 30% tax relief on this amount, meaning the most you’ll ever be able to get is £300,000 in relief.
However, what’s interesting is that this limit is for individuals.
As such, a married couple could each invest their maximum £1 million pounds per year.
There are also no minimum investment requirements to qualify for EIS at all.
One extremely important thing to note is that you can’t qualify for this scheme if you have any connection to the business in question.
You can either be connected to the company financially or via employment.
Example of EIS rules
For example, if you own the company or buy shares that are worth more than 30% of the business, then you don’t get any tax relief at all.
Similarly, if you are employed by the business in any way, then you’re deemed to be connected to it, and you can’t reap the EIS tax relief rewards either.
Of course, one of the most critical rules is that you can’t invest in more than 30% of the shares for any given business.
If you do this, then you won’t get any tax relief, and this whole scheme becomes irrelevant to you.
Additionally, you mustn’t forget that you need to hold onto the shares for at least 3 years to start gaining your tax relief.
To claim your tax relief, you need to obtain an EIS3 form from the company you’ve invested in.
As the investor, you’ve got to fill in your self-assessment tax return, displaying the EIS as an investment.
Can tax relief be carried forward?
One of the most intriguing things about the EIS income tax relief scheme is that it offers capital gains tax deferral relief.
In essence, you can defer tax on capital gains that were achieved on a different asset as long as you hold your EIS shares.
But, you must have sold this other asset less than three years before you obtained your EIS shares or less than twelve months after it.
This deferral relief is totally unlimited.
What this means is that the EIS cap of £1 million per year doesn’t apply.
You can also claim this if you have more than a 30% interest in the company.
EIS Income Tax Relief Scheme Examples
There’s quite a lot of information to take in, and it can be a bit difficult to really picture what all of this means.
So, the best way to understand how this scheme works is by showing you some examples.
Please bear in mind that these are just made up examples where the figures are nicely rounded to explain things easier!
Firstly, let’s say you invest £100,000 in a business and have held onto your shares for the minimum 3 years.
Now, what happens if the business doubles in value during this time
Your shares are now worth £200,000, and you want to sell for a sizeable profit.
Here, you get a grand total of £130,000 in profit.
This is calculated by considering your income tax relief at 30% of your investment (£30,000) and the profit from your share sales.
If you sold them for £200,000, then the profit from the sale is £100,000 as you take away your original investment.
To make things even better, you have absolutely no capital gains tax to pay as you’re exempt thanks to the scheme!
Let’s take the same scenario but say the company stayed at the same value when you sold your shares.
Here, you don’t make a profit or loss on the share sales, but you still gain money from the income tax relief of £30,000!
Hopefully, this all makes sense to you, and you understand what the EIS income tax relief scheme is.
It can help reduce the amount of income and capital gains tax investors pay, while also assisting small businesses at the same time.Contact us