Since EIS was launched in 1993-94, over 26,000 individual companies have received investment through the scheme, and over £15.9 billion of funds have been raised. Data for 2015-16 shows that 3,285 companies raised a total of £1,647million of funds under the EIS scheme. In the same period, 1,500 companies raising funds for the first time under the scheme raised a total of £787million.
The EIS is designed to help SMEs raise finance by offering a range of tax reliefs to investors who purchase new shares in these SMEs. Investors are eligible for the following tax reliefs:
Up to £1 million per individual may benefit from 30% income tax relief. For each £100,000 of investment, the actual cost is £70,000. The whole of this allowance can be carried back to the previous tax year to offset against income tax, i.e. a theoretical £2 million could be invested of which £1 million (the maximum EIS qualifying investment in a single tax year) could be carried back to the last tax year.
With increasing rates of tax and restrictions on pension’s contributions, this opportunity may be increasingly attractive for tax planning. Shares must be held for a minimum of three years from the date they are issued to the Investor for this relief to be available.
Provided the shares are held for a minimum of three years, there is no Capital Gains Tax (CGT) due on the proceeds. However, the shares can be held for much longer, to realise the investment potential, thus continuing sheltering gains from CGT and potentially sheltering substantial capital gains.
Inheritance Tax (IHT) has been dubbed the ‘optional tax’, and many individuals today are exposed to potential IHT bills, largely because of relatively high property prices. However, high-earners are potentially more exposed. After two years from the investment date, EIS qualifying companies generally fall outside the estate for IHT purposes, potentially allowing considerable assets to be preserved intact for dependants, saving 40% IHT.
Loss relief applies in the event a share should become crystallised at a loss. Were a share to be worthless, the loss could be offset against income tax. For a 40% taxpayer, the £70,000 net cost could be offset against that year’s tax bill, or the previous tax year’s allowing £28,000 to be claimed back, so the actual loss would be £42,000. In other words, 42p in the pound is the maximum exposure i.e. less than half the original outlay is at risk. For a 45% taxpayer, the same relief mitigates downside exposure to 38.5p in the pound. Losses can also be offset against CGT at the prevailing rate, currently 28% for higher-rate tax payers, in either the current tax year or subsequent tax years.
This is also available in addition to the above and is not capped at £1 million. This allows up to three-year-old capital gains tax to be rolled over into EIS qualifying companies and potentially be further reduced by other tax allowances over a period of time, such as timing disposals in order to utilise annual CGT allowances and inter-spousal transfers to maximise tax efficiency.