QUESTION: I inherited some money recently and I’m looking for a tax efficient investment opportunity. A work colleague told me that if I invest £100,000 into an enterprise investment scheme I can reclaim £30,000 income tax back from the taxman. This seems like a very impressive tax planning opportunity. What are the conditions?
ANSWER: The purpose of the Enterprise Investment Scheme (EIS) is to help certain types of small higher-risk unquoted trading companies to raise capital. It does so by providing income tax and CGT reliefs for investors who invest in qualifying shares in these companies.
Income Tax Relief - An investor can receive income tax relief at 30 per cent, on investments in an EIS company, of up to £1,000,000 (£2m a year for knowledge-intensive companies from April 2018). Consequently, EIS relief can currently reduce an investor’s personal income tax liability by up to £300,000 a year.
Capital Gains Tax Exemption - On the sale of EIS shares, there should be no charge to capital gains tax, as long as the shares are held by the individual for at least 3 years and the income tax relief has not been withdrawn.
Capital Gains Tax Deferral Relief - If an individual has a pre-existing capital gain, it is possible for him to invest (within a specified time period) into a qualifying EIS company and defer his personal capital gains tax liability. The deferred gain will crystallise if, and when, the EIS shares are eventually sold.
Loss Relief - If the EIS company does not succeed and the shares fall in value, the investor can obtain an additional tax loss relief, as a qualifying capital loss arising on the disposal of EIS shares can be set against other capital gains or taxable income. In computing the loss it is necessary to reduce the cost of the shares by the amount of income tax relief given and not withdrawn.
This is a very attractive package of tax reliefs which can be achieved if careful tax planning is carried out. The conditions of the scheme are fairly onerous as the tax relief is offered as an incentive to invest in these companies because of the high risk such investments pose to the investors’ capital.
The shares must be new ordinary shares, subscribed for in cash and must not be redeemable for at least 3 years. For the income tax relief and CGT exemption, the individual investor must also not be connected with the company. This mainly excludes someone, who together with associates controls more than 30 per cent of the company.
The EIS company must be an unquoted trading company and must carry on a qualifying business activity in the UK and the money that is invested must all be used for the purposes of the company’s trade.
While the tax reliefs available to investors in EIS companies are incredibly generous, great care is required to avoid a future claw-back or withdrawal of the tax relief within the three year investment period. Investors should also seek professional advice on the risk associated with investing in EIS shares.
An EIS investment is a high risk investment and the capital value of the investment can fall as well as increase in value.
:: Janette Burns (j.burns@pkffpm.com) is associate director at PKF-FPM (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
