The Enterprise Investment Scheme (EIS) has been in operation for over 24 years and tens of thousands of companies have benefitted from investment through this scheme as well as their investors. This scheme allows people to invest in a qualifying company and in return they receive relief on their income tax, which is 30% of the amount they invested.
When you invest in a company which qualifies for EIS relief, there are certain conditions you have to meet. Firstly, you must own the shares for at least 3 years. If you sell them before the three year period has ended, any relief claimed will be clawed back by HMRC. The maximum you can invest in a single year into companies qualifying for this relief is £1,000,000, enabling a person to receive up to £300,000 tax relief from their investment.
You are able to invest in several qualifying companies within a single year, but it is important to note any relief provided is considered a tax reducer only. This means that you can obtain a refund on any taxes you have already paid in the year by claiming EIS relief, but if your tax liability was £0 in the first place, no money can be repaid to you so there would be no benefit to EIS relief for that particular year.
If you did claim EIS relief and the relief was greater than your tax liability, it is possible to roll back any unused relief to a previous year, reducing the risk of losing any relief. As an example, a person who had invested in £100,000 of EIS shares would receive EIS relief of £30,000. If this person had a tax liability for the year of £20,000 the EIS relief would reduce that liability to £0. The remaining £10,000 of unused EIS relief could then be carried back to the previous year to reduce the previous year’s liability as well.
A couple of final points are that when you come to sell shares in an EIS company, provided you have held them for more than 3 years and EIS relief has already been claimed on the investment, any gains from this sale are also exempt from Capital Gains Tax.
Finally, as with most investments, there is always a risk involved. As is the case with any company you invest in, the value of your investment will alter based on the value of the company. If the company you have invested in is successful, your investment would typically increase whereas it will typically decrease if the company does not do well.
EIS relief is a great way to invest and receive large tax reliefs at the same time, just make sure you choose the companies you invest in wisely and claim the relief available so that you benefit from all the exemptions.