If you’re looking to start your own company based out of the UK, it can feel like taking a financial leap of faith. One of the ways you can give yourself a little more breathing space in the first few years of your business is by taking advantage of the EIS.
The Enterprise Investment Scheme (EIS) is a UK Government tax relief scheme designed to encourage investment in start-up businesses.
Since its launch in 1994, the scheme has promoted private investment of more than £10 billion within the UK – a testimony to its success within the investment sphere.
As a form of tax relief, EIS can benefit you as a business by making investing in your company more attractive and a lower-risk investment opportunity.
Using this scheme, investors can claim relief on up to £1m worth of investments. You can claim back up to 30% of the value of investments into EIS-eligible companies.
There are two types of capital gains tax reliefs within the Enterprise Investment Scheme:
These captain gains reliefs can provide an extra incentive to investment in an EIS-qualifying company.
Loss relief is claimable by investors when a company you have invested in performs badly and results in a loss. The relief claim will be at the equivalent rate to the income tax you pay. For example, if you buy shares for £10,000 and the business fails, you can claim the 30% income tax relief for £3,000 of that initial investment and then claim loss relief on the remaining £7,000 to minimise the total loss of the investment.
Investment in an EIS-qualifying company can benefit from 100% relief from inheritance tax after the investment is held for two years or more. So, liability for inheritance tax regarding these shares can be reduced or eliminated.
EIS relief carry back provides the opportunity to claim tax relief on income tax paid in the previous financial year by treating some of the shares as being issues in the year prior, as long as you do not reach the EIS limit for that year.
EIS carry back is most beneficial when making investments that exceeds your income tax paid in the current financial year. However, even in cases where EIS-eligible investments are modest, it can often still be worth carrying back your tax relief. This enables you to retain your full tax exemption for the current year.
There are a number of rules in place for investors that are looking to claim EIS tax relief. As such, it is important to be aware of the limitations.
First, you may only invest up to £1 million in EIS-qualifying companies within a single tax year. This may be split through numerous companies. Additionally, EIS tax relief must not be carried forward.
You may also only hold the shares for a minimum of three years. Any shares disposed of within this period, through sale or gifting will be subject to relief clawback.
Shares subject to tax relief must be brand new shares that have not been on the market previously and the investor must have no direct connection to the EIS company.
Providing you meet this criteria, you may claim EIS tax relief. To do so, you must make HMRC aware of the claims for relief in the current tax year. They will then either make an adjustment to your Self-Assessment or change your PAYE code.
Claims for losses are slightly different, requiring you to make a claim through your tax return. This must be done before the following 31 January.
Investors may invest in companies with under 250 employees and up to £15 million in gross assets, under the EIS. This scheme has been successful in supporting the growth of British businesses, enabling investment in smaller, high-risk companies.
The EIS and SEIS (Seed Enterprise Investment Scheme) are similar in providing tax relief for investors. The main difference between the two schemes is that the SEIS focuses on companies in the seed stage. To put this into context, a company eligible for SEIS may be raising up to £150,000 to qualify, while EIS-qualified companies can raise up to £5 million.
For further advice on how to use EIS to boost your business, give our team of financial advisors a call today. We’ll be happy to help you maximise your business’s bottom line and provide practical advice for how to make your business a financial success.
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