20th November 2019
The Enterprise Investment Scheme (EIS) is an extremely generous UK government programme set out by the government to encourage equity investment in earlier stage fast-growing companies, by reducing the risk of the investment with tax-relief. Since the EIS was launched in 1993, more than £18bn in funds have been raised, enabling over 27,000 companies to have received investment and grow. If you are looking to invest in UK businesses, who are EIS-approved like Crowd2Fund, here is everything you need to know. It’s important to remember tax treatment of any of the investment offers will depend on the individual circumstances of each investor and may be subject to change in the future.
Why Invest in EIS-Approved Businesses?
Quite simply, it can provide a tax-efficient way to invest in potentially high-growth businesses, while significantly reducing the exposure to risk you would usually face. EIS includes various tax incentives, listed below:
- Income Tax Relief
Tax relief of up to 30% can be claimed on investments. You can invest up to £1m in total per tax year, in several EIS-approved companies, giving you a maximum tax reduction in any one year of £300,000, provided you have sufficient Income Tax liability to cover it.
- Capital Gains Tax exemption
Saving tax in the long-term, any gain is capital gains tax-free if the shares are held for at least three years and the income tax relief was claimed on them. The shares can be held for much longer than three years, making this an appealing long-term investment choice.
- Loss Relief
Recognising the high-risk nature of early equity investment, if shares are disposed of at a loss, the investor can also claim loss relief. Either set against income tax or capital gains tax, the investor can claim tax relief on the amount lost after the original income tax relief is deducted. This is claimed at the rate you pay tax. For example, if you are higher rate taxpayer and invest £10,000, you could claim £3,000 tax relief initially and a further £3,150 loss relief if the company fails.
- Capital Gains Tax deferral relief
You can defer paying CGT from another investment if the money is used to invest in an EIS qualifying business. The investment must be made one year before or three years after the gain arose to defer CGT.
- Carry Back
If you have more income tax liability the year before you acquired the shares, you can choose to “carry back” the tax relief. This is subject to the overriding limit for relief for each year.
- Inheritance tax relief
EIS investment provides 100 per cent exemption from inheritance tax because of business property relief. In the event of death, as long as the investment was held for at least two years prior, the investment should fall outside your taxable estate.
What are the EIS Tax Relief Rules for Investors?
The shares must be held for at least three years from the date of issue or the tax relief will be withdrawn. People connected with the company are not eligible for Income Tax Relief on their shares.
To qualify for these tax benefits, investors must abide by the following rules:
- You can only invest up to a maximum of £1 million in any number of qualifying companies in each tax year.
- You must hold the shares for a minimum of 3 years. If you sell or gift the shares within the 3 year period, you will be subject to relief clawback.
- You cannot carry-forward your EIS tax relief.
- You must be a UK taxpayer.
- You must not be connected to the EIS company (the meaning of connected being: (i) an employee (ii) partner (iii) a paid director)
- You must be buying brand new shares that are not already on the market.
How does it work in practice?
Taking Crowd2Fund as an example, if you invest £20,000 in the current investment round, you would be able to claim up to £3,000 tax relief in your 2019/20 tax return. If the company grows as planned, without a Series A investment round, after three years your shares would be worth £39,230.28. If you sold your shares you would have gained £19,230 tax-free, plus £6,000 tax relief, while only investing £14,000 of your net income.
If the company does not grow you won’t benefit from the CGT relief, but you will have gained £3,000 of income tax. In a worst-case scenario, where the company closes and your shares are worth nothing, you will have risked £7,000 and could claim up to £3,150 loss relief, if you are a higher rate taxpayer, with sufficient tax liability. This would mean you would only lose £3,850.
How do you claim your tax-relief?
HMRC will issue an EIS2 form to the business in question, who will then use it to issue EIS3 forms to their investors. You will then use this EIS3 form to complete the “Additional information” sheet (form SA101) when filling out your Self-Assessment tax return for the year.
Crowd2Fund recently moved to use Capdesk, an online platform for equity management, where you can easily view and access your shares and related documents, such as the EIS3 form. Claims can be made up to five years after the investment. *At the time of writing, we are awaiting the EIS2 form from HMRC.
If you would like to discuss investing in Crowd2Fund’s EIS-approved investment round, please contact us on +44 (0) 203 735 5669 and will be delighted to schedule a call.
You can also watch this informative video about EIS here.
Risk warning: Tax relief depends on an individual's circumstances and may change in the future. In addition, the availability of tax relief depends on the company invested in maintaining its qualifying status. The value of your investment can go down as well as up, so you could get back less than you invest. Capital is at risk.
