Maximising your tax relief: a brief overview of the Enterprise Investment Scheme
ANEES HUSSAIN from Nottingham accountancy firm Page Kirk looks at how small businesses can benefit from a unique government programme.
The Enterprise Investment Scheme (EIS) provides tax reliefs for individuals who invest in small trading companies. It is effectively intended to encourage greater funding for an innovative society and tax relief is available in the form of income tax and capital gains tax.
The income tax relief associated with shares purchased in EIS companies is received at a rate of 30% on the acquisition cost of the shares. This relief will be offset against the investor's income tax liability for the tax year when the investment is made, or the previous tax year.
In addition, EIS investments can be used to defer capital gains tax liabilities resulting from the disposal of any type of asset including for example property disposals.
Conditions of the scheme – the investor
The investor must meet the following conditions in order for their investment to qualify for relief:
- They must hold no more than 30% of the issued share capital of the company; and
- Hold the shares for three years; and
- Must not be a paid employee of the company.
Conditions of the scheme – the company
In order to qualify as an 'EIS company', the company in which shares are acquired must be 'small'. Broadly, this is defined for this purpose as a company with gross not exceeding £1 million before the share issue; not more 250 employees; and the company must an unquoted, trading company.
Companies that do not qualify as an 'EIS company' include those which are involved in hotel operations, property development and farming.
Claim for EIS tax relief
Tax relief on an investment in an EIS company can be claimed either on the investor's self-assessment tax return, or via an independent claim. In order to make a claim for tax relief, the investor will need an EIS3 form, which should be issued by the EIS company they made the investment in. Once the investor receives this, they should provide this documentation to their accountant, who will process everything on their behalf. Their accountant should consider how to maximise tax relief and consider whether to make use of the carry-back facility if for example the investor paid tax at a higher rate in the previous tax year.
If the investor realises a loss when the shares are sold or if the company goes bust, they are potentially eligible to offset the loss - after deducting income tax relief when the shares were purchased – against their income or gains for that year. This is a unique situation because income tax relief cannot usually be claimed on losses incurred on share disposals, and as income tax rates are greater than capital gains tax rates this could be attractive to an investor.
EIS v Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme (SEIS) is another initiative devised to stimulate greater entrepreneurialism in our economy. There are two major differences compared to EIS. First of all, SEIS investments give 50% income tax relief on the cost of the shares acquired (compared with 30% for EIS investments). Secondly, SEIS typically involves investment in, much smaller companies and involve greater risk from an investment perspective.
Page Kirk has a dedicated team of tax specialists who are experienced in handling and processing tax relief claims for such investment schemes. Our tax team have the necessary expertise to assist in a variety of matters, maximise your tax efficiency and ensure that you save time, whilst allowing you to maintain peace of mind, knowing that your affairs are in safe hands.
For more information, please contact us on 0115 955 5500 or email enquiries@pagekirk.co.uk.