Enterprise Investment Schemes

EISs

The EIS is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

Like VCTs, Enterprise Investment Schemes (EIS) were introduced to stimulate investment into developing businesses. There are differences in structure and tax treatment. EIS companies are not quoted on a main stock exchange and must be trading companies that exclude a number of areas, such as land, property, hotels and financial services. In return for investing in a business that qualifies as an EIS and for an investment of up to £400,000 in any one tax-year, the investor receives:

1. Deferral of tax on capital gains made in the three years before the investment or one year after the investment
2. A rebate from income tax due in the tax-year of investment of 20% of the investment, provided the shares are held for at least three years.
3. Exemption from tax on any capital gains made on the investment.
4. Loss relief against income, i.e. any losses made when selling the shares can be set against income tax, not just against other capital gains.

The shares must be held for a certain period or income tax relief will be withdrawn. Generally, this is three years from the date the shares were issued. But if the qualifying trade started after the shares were issued, the period is three years from the date the trade actually started.

Income tax relief can only be claimed by individuals who are not 'connected' with the company.

Because it is an investment into an unquoted company it is treated as a business asset”. This means that after two years your holding falls outside of your estate and so is exempt from Inheritance Tax.

Unlike VCTs, there are no exemptions to tax on EIS dividends. After all, the usual objective is to make capital gain not to generate income.

EIS investments are into single companies, there is no risk reduction from the portfolio effect – unless you invest in a number of EIS companies. This is possible by investing into an EIS fund. These funds raise capital for investment into a number of EIS qualifying companies and in this sense are similar to a VCT. However, their funds are usually much smaller and consequently are restricted to investing in fewer companies. Hence EIS funds are more risky than VCTs as well as giving different tax relief. A key point is rather than holding shares in a single investment company you hold shares in the underlying companies and get the tax breaks as the investments are made. If the fund manager cannot meet the investment time rules you may lose some of the tax-relief expected. Another important difference is that the fund manager will normally look for growth and an early exit route after the three year limit in order to realize gains. Hence, they are aimed at mid-term gains rather than the continuing stream of dividends from VCTs.