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Private Equity

About EIS

Private Equity Terms & Conditions

Private Equity FAQs

What is EIS?

About EIS

The Enterprise Investment Scheme was designed by the Government to provide investors with an incentive to invest in smaller unquoted companies.

The tax benefits of EIS are only available when new shares are bought.

There are five current EIS tax reliefs:

Income tax relief

Provided an EIS qualifying investment is held for no less than three years an individual can reduce their income tax liability by an amount equal to 30% of the amount invested. The minimum subscription is £500 per company and the maximum per investor is £500,000 per annum.

Capital Gains Tax Deferral Relief

Tax on gains realised on a different asset can be deferred indefinitely, where disposed three years before or one year after a subscription. Deferral relief is unlimited.

Capital Gains Tax Freedom – No Capital Gains Tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.

Loss Relief

If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such loss can be offset against the investor’s capital gains either in the year of disposal or against the previous year’s gains. For gains offset against income tax, the net effect is to limit the investment exposure to 35p in the £1 for a 50% taxpayer if the investor realises a total loss. Alternatively, the losses can be offset against Capital Gains Tax at the prevailing rate of 28%.

Inheritance Tax Exemption

EIS Investments are generally exempt from Inheritance Tax after two years of holding the investment.

Significant Changes from April 2012

The most recent budgets in April & December 2012, the Chancellor announced a number of very significant changes to this scheme. The aim is to help smaller companies to obtain finance by increasing the incentives for potential investors. The Finance Bill 2012 was passed in July 2012.

The maximum size for an EIS qualifying company is 250 employees and gross assets of £15 million. The maximum annual amount that can be invested in an individual company is £1 million.

Although tax breaks exist under present legislation, they are subject to change.

Working Examples

1. Income Tax Relief

From 6 April 2011, qualifying individuals can credit an amount equal to 30 percent of the amount subscribed for eligible shares against their total liability to income tax for the tax year in which the shares are issued. The relief is available against a UK income tax liability irrespective of whether or not the investor is resident in the UK. The amount of relief given cannot exceed an individual’s tax liability.

Example £

Gross investment in shares 100,000
Less: income tax relief at 30% 30,000
Net cost of investment 70,000

A qualifying individual can claim to carry back part of their subscription to the previous tax year. The maximum amount which may be carried back is £500,000. In this instance, an individual can subscribe and claim for EIS benefits for up to £1,000,000 of EIS qualifying shares, in the current tax year. The minimum subscription is £500 per company and the maximum per investor is £500,000 per annum

2. Capital Gains Tax Relief

To the extent EIS income tax relief is available and not liable to be withdrawn, any capital gain accruing to the original investor on the disposal of his shares shall be exempt from capital gains tax, provided that the shares have been held for at least three years.
Example £
Realised value of shares after 3 years 250,000
Less: original gross investment 100,000
Tax-Free Gain 150,000

3. Loss Relief

If the original investor disposes of his shares at a loss, the net loss (after EIS income tax relief) may be set against other taxable income or chargeable gains, at the election of the investor.

Example £

Realised value of shares 0
Gross investment in shares 100,000
Less: income tax relief at 30% 30,000
Loss before tax relief 70,000
Tax relief at 50%* 35,000
Net loss 35,000

*Assumed the net loss was offset against another income taxable at 50% as opposed to chargeable gains which are taxable at 28%.

4. Capital Gains Tax Deferral

The liability to capital gains tax arising on the disposal of any asset may be deferred by investing the gain in eligible shares. The investment must be made within the period beginning one year before and ending three years after the event which gives rise to the gain being deferred. Although there is a limit of £500,000 for income tax relief and capital gains tax relief, there is no limit on a number of capital gains that can be deferred.

Example £

Gross investment 500,000
Less income tax relief 150,000 (30% of £500,000) 150,000
Cost of investment 350,000
Capital gains tax liability deferred* 140,000
Net initial cost of investment 210,000

*Assumed at 28%, the gain is deferred until there is a chargeable event, such as a disposal of shares or, if earlier, breach of the EIS rules. Entrepreneurs who sell their business have to choose between Entrepreneurs relief of 10% on their gain or EIS deferral relief and then pay capital gains tax at the rate that is in force when the EIS investment is sold.

5. Inheritance Tax Exemption

Like any other ‘unquoted’ investment, an EIS investment will qualify for inheritance tax relief if it is held for at least two years.

An individual wanting to benefit from investment in EIS shares will need to check with their financial adviser. Companies must fulfil certain criteria to be eligible for EIS investment, but they will normally confirm they are eligible at the time of the fundraising. The qualifying company must have gross assets of no more than £7m prior to the fundraising.

Further information on EIS can be found on the Enterprise Investment Scheme Association’s website: www.eisa.org.uk. The statements above are intended only as a general guide to the current position under UK law and H M Revenue & Customs practice and may not apply to certain classes of person (such as dealers in securities). Any person who intends to seek to obtain EIS Relief in respect of his investment, or who is in any doubt as to his tax position, or who is subject to tax in a jurisdiction outside the UK, should consult their professional advisers.

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