Enterprise Investment Schemes (EISs)
A tax efficient investment for sophisticated and adventurous investors who can afford to invest for the long-term.
The initial charges levied by EIS’s vary widely. We are generally able to discount the initial charge by 3% of the amount that you invest. Charges for EIS’s are set out in a prospectus and to find out the terms that we are able to offer please call us on 0808 100 5045.
You must be a confident investor and seek the EIS that you want to invest in before you can benefit from our services. We do not actively promote EIS’s. If you are in anyway unsure about investing in an EIS you must seek professional advice from a suitably qualified financial adviser. EIS’s are at the top end of the risk spectrum and you must be comfortable with the risks before investing in this type of investment.
Tax relief
Tax relief is potentially available from income tax, capital gains tax and inheritance tax, but these rules can change.
- An income tax rebate of 30% is available on investments up to £500,000 per tax year.
- No capital gains tax to pay on disposal if the shares have been held for three years. You can use an EIS to defer a capital gain liability too.
- EIS investments fall outside of the estate for inheritance tax purposes providing that the EIS continues to trade and was held for at least two years at the time of death
Dividends from EIS companies are paid with a 10% non-reclaimable tax credit and are potentially liable to further income tax. Consequently most EIS companies do not pay dividends as it is more tax efficient to roll up income within the company as tax free growth.
Income tax relief
Although anyone can invest in an EIS, you should be aware that the tax rebate is only available to offset any income tax that you pay. You can invest up to £500,000 each tax year however you can only receive tax relief equal to the amount of income tax that you pay, capped at £150,000 (30% of £500,000). For example, if you invest £500,000 and only have an income tax liability of £10,000 you will only receive tax relief of £10,000.
You must hold shares for 3 years to retain the rebate and will need to pay some or all of the rebate back if you sell your shares before 3 years has passed. This tax rebate cannot be offset against dividend tax, only income tax.
In order to keep the rebate permanently, the EIS company has to trade for three years following the issue of shares to the investor, who has to continue to hold them for at least three years.
Carry back rules
In addition an investor can elect to 'carry back' up to £500,000 of the EIS investment to the previous tax year. This means that income tax already paid could be reclaimed. It also means that up to £1 million can be invested in a single tax year if an EIS investment wasn’t made in the previous tax year.
Capital gains tax (CGT)
There are two aspects to capital gains tax relief.
- No CGT liability on disposal providing that shares have been held for at least three years.
- Ability to defer a capital gain into an EIS investment thus deferring the payment of capital gains tax. Deferring a capital gain allows an investor to delay paying a CGT bill on an investment sale if the sale proceeds (or part of) are invested into an EIS. Any amount of capital gain can be deferred into an EIS - even above the £500,000 annual limit. The gain is re-crystallised when the EIS is sold and CGT then becomes payable at the prevailing rate at that time. If CGT rates fall, investors benefit but if the tax rates rise then the bill will be higher than if it had been paid originally.
Any gains made in the previous three years can be deferred into an EIS too. If CGT has already been paid, this can be reclaimed. In addition, any gain made in the 12 months following an EIS investment can also be deferred. Subject to the availability of future EIS schemes it may be possible to continue to defer capital gains until the investor dies. At death there is no CGT to pay.
Please remember: that if the taxpayer becomes non-resident, unless by reason of their employment, the deferral ceases, and the gain will become chargeable.
Inheritance tax
As long as an EIS is held for at least two years, and continues to trade, full relief is given from inheritance tax against the value of the investment; effectively the investment falls outside of an estate for inheritance tax purposes. It is based on the value at the time of death, not the cost of the investment. This obviously assumes the investment is held at the time of death.
Loss relief
Where an investor incurs a loss on the first disposal of eligible shares, this loss (calculated after deducting income tax relief from the cost of the investment) may be set against taxable income of the same year or the previous year at the election of the investor. Alternatively, the loss may be offset against capital gains in the tax year of disposal. Any excess losses can be carried forward for relief against future capital gains.
At current rates, the operation of this relief, together with income tax relief, limits the potential downside to 65% of the costs of your original investment.
What are the risks
EIS’s are not traded on a stock exchange so withdrawing cash can be difficult or, at times impossible. Investors have to wait until the manager realises the investment before receiving their money back. It may not always be possible to sell an investment, not least because the tax benefits are only available when the scheme is set up, they cannot be purchased later on.
There are strict rules issued by HM Revenue & Customs about which businesses qualify for investment from an EIS, for example, businesses providing legal or accountancy services are not eligible. If HM Revenue & Customs are not satisfied that the EIS meets with the criteria set out, tax relief may not be granted.
The rules governing the EIS are complex and interrelated with other legislation so it's nearly always essential to consult a professional who is experienced in this area before committing to a scheme.
EISs are at the top end of the risk scale, but in return, you probably get the most tax advantageous investment available to sophisticated investors.
EISs should only be considered by sophisticated, wealthy and adventurous investors. If at any point you are unsure about investing in an EIS or if you do not fully understand the implications you must seek advice from a suitably qualified financial adviser.
How to invest in an EIS
Each EIS will issue a prospectus at launch which gives details of specific risks. You must read this thoroughly before making any investment. You can request prospectuses for EIS’s from us by telephoning FREEPHONE 0808 100 5045 or by emailing info@commshare.com.
If you wish to invest in an EIS you need to complete the application form found at the back of the relevant prospectus. The completed form needs to be sent to us together with your cheque payable to the EIS (not CommShare). You will then receive your share and tax certificates directly from the EIS company once the shares have been allotted. Please be aware that this often takes at least four weeks as shares are generally allotted, at most, once a month. We will credit your CommShare Cash Account with the commission rebate due as soon as we have been paid by the EIS company.