Risk warning: An investor’s eligibility to receive tax relief depends on their individual circumstances and on the company’s qualifying status, both of which may be subject to change. If you are unsure about your ability to claim certain tax reliefs, you should seek independent tax advice before making an investment.
EIS TAX RELIEF
HOW INVESTING IN SMALL BUSINESSNESS CAN BENEFIT THE INVESTORS
What is EIS Tax Relief?
EIS is a tax relief scheme, launched in 1994, designed and implemented by the UK Government. The Enterprise Investment Scheme (EIS) helps early stage, high-risk companies to raise finance by offering tax relief to investors in the companies that qualify. For the investor, EIS is a tax efficient way of investing in these small companies, allowing individuals to invest up to £1,000,000 per year at a tax relief rate of 30%.
In 2011 the Seed Enterprise Investment Scheme (SEIS) was introduced to further boost the economic growth in the UK by promoting new enterprise and entrepreneurship, seeing the possible cash back figure rise to 50% for investments into certain very early stage companies.
In addition, there is a ‘carry back’ facility to EIS, which allows investors to offset against their tax bills from the previous, as well as the current year. All, or part, of the cost of the shares acquired in one tax year can be treated as through they were acquired in the preceding tax year.
Relief can then be given against the Income Tax liability of that year, instead of the actual year acquired. However, the ‘carry back’ is subject to the overriding limit.
Why invest in EIS with Capital Cell?
- Get up to 30% cash back on investments through the Enterprise Investment Scheme
- Help contribute to the growth of innovative seed stage life science companies with a high social impact
- Grow a more stable, diverse portfolio, with investments from as little as £500
- Carefully select the companies you invest in and the angels you invest alongside
- Receive the relevant certificates you need directly to make your tax relief claim
What tax relief is available?
1. Income tax relief
No minimum investment in any one company during any one tax year is stipulated through EIS, however companies often set their own minimum amount as part of funding rounds.
30% tax relief can be claimed on total investments of up to £1,000,000 per tax year, equalling a maximum tax reduction of £300,000 in any one year. However, investors must have sufficient Income Tax liability to cover it. EIS allowances are allocated on an individual basis, therefore the maximum investment amount is £2,000,000 for 2 people (a married couple for example) and shares in these small companies must be held for at least 3 years from the date of issue, otherwise the tax relief will be withdrawn.
Investors, who are connected with the company they are investing in, cannot claim Income Tax Relief on their shares.
2. Capital Gains Tax exemption (CGT)
If shares are held for at least 3 years and the company maintains eligible status during this period, and Income Tax Relief was claimed on those shares, any gain on the investment is exempt from CGT. Shares can be held for a much longer time period than 3 years, if desired, potentially enabling investors to accrue CGT exemption over a long period of time. This can be a very attractive aspect of EIS investment for investors.
3. Capital Gains Tax deferral relief
If capital gains are invested into a company that is offering EIS investment, the payment of CGT can be deferred. The investment must be made one year before, or three years after, the gain arose, but can be made from the disposal of any kind of asset.
Connection to the company, in which the investment is being made, does not affect deferral eligibility. Unconnected investors are eligible for both Income Tax Relief and CGT deferral Relief.
4. Loss relief
Sometimes shares are sold at a loss. In this case, the investor can elect that the amount of the loss, minus the amount of Income Tax Relief given, can be set against the income of the year in which they were disposed of. Alternatively, it can be set against the income of the previous year, rather than set against any capital gains. Loss relief is calculated at the appropriate Income Tax rate for the individual investor.
A Connection to the Company
Investors with a connection to the company are not eligible for Income Tax Relief.
A connection by financial interest is any circumstance where the investor controls the company or holds more than 30% in shares and has voting rights. The conditions apply for up to 2 years before and for 3 years after the issue of shares. If an investor becomes connected during this time frame, relief will be withdrawn. All relatives (except brothers and sisters) are also included within these restrictions.
A connection by employment includes partners, directors and any employee of the company. Associates (business partners, trustees and relatives) are also included in this category. This category is subject to the same conditions as a connection by financial interest. The only exceptions are Business Angels (where the only connection with the company is as a director who receives no remuneration and the director had not previously been involved in the company’s trade at the time the relevant shares are issued).
Claiming your tax relief
Investors can only make their Tax Relief claim, once the company has issued an EIS3 form. Claims are then made via self-assessment tax returns, for the year in which the shares were issued. Claims can be made during the 5 years following the investment. The 5 year counter begins from the first January 31st after the investment was made.
Tax relief that is withdrawn or reduced
If you become connected with the company, in any of the ways explained previously, Tax Relief will be withdrawn. Additionally, if the company loses its EIS qualifying status, this affects your Tax Relief. A company must meet certain criteria in order to be EIS eligible and maintain these criteria for the minimum 3-year holding period, in order to keep their status. If they fail to do so, the Tax Relief can be withdrawn.
If shares are disposed of, or if the investor receives “value” from the company (in the form of a loan or an asset below market value) then relief can be either reduced or withdrawn.
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EXAMPLES OF EIS TAX RELIEF
You gain £20,000 in profit (and owe no Capital Gains Tax) plus the £3,000 Income Tax relief
You receive back your £10,000 plus the gain of £3,000 Income Tax relief
Your loss of £7,000 (£10,000 invested – £3,000 Income Tax relief), is awarded loss relief at your marginal tax. If you are in the 45% tax bracket your loss relief will be 45% x £7,000= £3,150. This mean your overall loss is just £3,850
Which investments on Capital Cell are eligible for Tax Relief?
EIS eligibility depends on the types of shares issued and the types of trade and activities carried out by the company. If a company has received notice (advance assurance) that HMRC are satisfied that the company and proposed investment should qualify for a tax relief scheme, it will be indicated on their Capital Cell campaign page. (In some instances, a written opinion from an independent professional qualified to give tax advice will be accepted in lieu of advance assurance from HMRC.)
Once the shares have been issued, HMRC will confirm whether the requirements of the scheme have been met.
What do I need to do to receive Tax Relief?
As part of the process of investing through Capital Cell, you will be asked to indicate whether you are a UK taxpayer and whether you would like to claim tax relief on qualifying investments. Once an eligible investment has been made, Capital Cell will provide you with a certificate, which can be used to make a claim through your self-assessment tax return (form EIS3 for EIS, or form SEIS3 for SEIS).
Claims can be made up to approximately five years after the investment is made.
JOIN CAPITAL CELL
Register today to see more detailed investment information