Enterprise Investment Scheme Changes get European Approval

16 January 2012

In the March 2011 Budget the Chancellor announced various changes to the Enterprise Investment Scheme, although these were subject to European approval. Now that this approval has been received, it is worth revisiting the Enterprise Investment Scheme, the tax reliefs associated with such investments and the relevant limits.

The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. The scheme was introduced in 1994 and the total value of subscriptions in 2008/09 was £503 million*.

The tax reliefs available to an individual investor include:

Income tax relief

The relief is currently 30% of the amount invested, subject to a maximum investment of £500,000. As the tax relief is given by way of a tax reducer you must have an income tax liability at least equivalent to the tax relief in order for it to be fully utilised. There is also the carry back facility, which allows you to treat an investment as if it were made in the previous tax year.

The shares must be held for a certain time period, generally 3 years from when the shares were issued and you cannot claim income tax relief if you are connected with the company.

With effect from 6 April 2012 the maximum investment that an individual can make, and receive tax relief on, will be increased to £1,000,000.

Capital gains tax exemption

If you have received income tax relief and providing the shares are held for the relevant period, any gain on disposal will be exempt from Capital Gains Tax (CGT).

Capital gains tax deferral relief

This relief is available to individuals and trustees. You are able to defer the capital gains realised on any other kind of asset providing the EIS investment is made one year before or 3 years after the gain arose. There is no minimum or maximum amount of gain that can be deferred and no minimum deferral period. The gain will come back into the charge to tax when the shares are disposed of, or they are deemed to be disposed of.

Loss relief

If the shares are disposed of at a loss, the amount of the loss less any income tax relief received, can be set against your current or previous year’s income.

In order for a company to qualify under the EIS it will need to meet various conditions (only certain trades will qualify) and it will have to be approved by HM Revenue & Customs. From 6 April 2012, the Chancellor has confirmed that the thresholds for the size of company that can qualify will be increased, along with the amount a company can invest. This should, therefore, mean more companies and larger companies are able to qualify.

Some EIS opportunities will involve investing in a single unquoted trading company and for this reason it is viewed as a high risk investment.  There are EIS funds available and these could offer more diversification.  With all EIS investments there may be no market for the shares and it may, therefore, be difficult to make a disposal.

If you would like to know more about the tax reliefs associated with a qualifying investment into the EIS, please contact Kari Mellon.


* Source: HM Revenue & Custom Statistics, Table 8.1 – this figure is currently provisional.