EIS Tax Advice from Allen & Atherton

Feb 2, 2023 | 0 comments

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The Enterprise Investment Scheme (EIS) is designed to encourage you to invest in smaller, riskier—yet higher potential capital gain—businesses. It grants generous tax incentives, delivers diversification and potentially high returns to your investment portfolio. Moreover, it allows you to support entrepreneurship and British business. However, the EIS tax laws are technical and have various regulations, besides being prone to changes. That’s why to enjoy the benefits of the EIS, you need EIS tax advice from Allen & Atherton.

Eligibility for EIS Investments

The UK government introduced the Enterprise Investment Scheme (EIS) in 1994 to help smaller, higher risk companies raise capital. This would in turn allow them to grow and thus create jobs and increase tax receipts over the long term.

As such, EIS focuses funding on specific business sectors which are bound to change with time, with some areas being promoted and some excluded. For example, companies in legal services, farming, market gardening, energy-generation, residential care, or hotels are currently excluded.

To be eligible for EIS investments, companies must be permanently based in the UK and have fewer than 250 employees. The total asset value should be less than £15 million before investment and £16 million after. In addition, the company must use the invested funds within two years. The invested money can only buy new shares, not those already existing.

Tax Benefits and Reliefs Associated with EIS

You are eligible for income tax relief not exceeding 30% on up to £1,000,000 in a tax year. In other words, you can take up to £300,000 income tax reduction in the year.

Your maximum investment limit doubles to £2,000,000 if you invest in a company pursuing innovative research or in the development phase when shares are issued. Therefore, with this law, you can deduct £600,000 from your yearly income tax if you are a high-net-worth investor.

If you invest a taxable capital gain, you can defer the capital gain tax for as long as the money stays invested. You can defer gains of any size, made up to three years before and one year after the EIS investment. You can even defer the gain if you have already paid the tax.

After two years, assets qualify for Business Property Relief (BPR). This means they become exempt from inheritance tax levied on your estate when you die.

You can also qualify for loss relief if the EIS investment you invested in dissolves and its shares lose value. This relief is calculated by multiplying the net loss by the rate you pay income tax.

Valuable EIS Tax Advice

As an investor, you should invest in EIS-eligible entities with growth potential and an exemplary management track record. Their product or service should have the potential for commercial success. It would be best also to check financial performance to minimize losses. “Due diligence is essential in EIS investments. Ensure that you understand the company’s business plan and potential risks.”

Ensure that the company complies with the regulations, such as the percentage of ownership and £12,000,000 maximum raise capital within a year. The company should strictly engage in a qualifying trade as noted above. “Make sure you understand the restrictions and requirements of the EIS scheme. Non-compliance can result in loss of tax relief and penalties.”

You should retain evidence of investment, such as share certificates, bank statements, investment agreements, and EIS3 certificates issued by the HM Revenue & Customs (HMRC). It would be best also to retain records containing disposal of shares and annual reports that the company you invested into issues to the HMRC.

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As an EIS investor, you should reject any benefits, such as loans, guarantees, or assets from the company. This is because UK laws prohibit it. You should also avoid related-party transactions with the company, or else you will lose the tax relief benefits.

Ensuring that you meet the holding period requirement is also essential. This period refers to the time you must hold the shares of an eligible company you invested in. The government set it to ensure you aren’t using the company to obtain tax benefits. Failure to meet the holding period requirement leads to the loss of your EIS tax relief benefits.

The government will also require you to pay back received tax relief, interest, and penalties. “The holding period requirement is a key consideration when making an EIS investment. Make sure you have the plan to meet it.”

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A Final Word

EIS investment is beneficial due to the tax benefits and potentially high returns. However, the law is strict on these investments to ensure they meet the intended purpose. Therefore, it would be best to get EIS tax advice from Allen & Atherton, a reputable firm with five offices worldwide, boasting over 200 employees. They suggest, “Seek professional advice when considering an EIS investment. A financial advisor can help you understand the benefits and risks.”

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