The enterprise investment scheme (EIS) is a scheme which encourages individuals to invest money in shares issued by qualifying unquoted companies with a permanent establishment in the UK for an income tax relief of up to 30% on the lower of the amount invested or £1m. This document discusses the aspects of income tax relief, claw back of income tax relief and allowable capital losses.
A subscription for eligible shares of a qualifying EIS company is a tax efficient investment for the individual. He can benefit from the following tax reliefs:
- income tax relief of up to 30% on the amount invested
- any capital loss on the EIS shares is an allowable loss for capital gains tax (CGT) but gains are exempt (if certain conditions are met)
- the investment can be used to defer CGT on the sale of any asset
These reliefs are considered in further detail below.
The conditions for a valid investment are discussed in the Conditions to be met by the EIS issuing company and Conditions to be met by the EIS investor guidance notes.
Generally speaking, EIS companies are high-risk investments. The nature of the conditions to be met by the company means that they have to be small businesses and therefore have a higher probability of failing (although the potential rewards if the company grows may be very attractive). Contrast this with venture capital trusts, where the investor spreads his risk by indirectly investing in a number of unquoted companies. See the Venture capital trusts tax relief guidance note.
Note that a sunset clause for EIS income tax relief has been introduced. This ensures that income tax relief will no longer be given to subscriptions made on or after 6 April 2025, unless the legislation is renewed by Treasury Order. ITA 2007, s 157(1)(aa), (1A)
Income tax relief
Rate of income tax relief
For subscriptions made on or after 6 April 2011, the income tax relief available is 30% of the lower of: