EIS are tax efficient investments sanctioned by the Government to encourage investment in UK business. The scheme encourages individuals to invest money in shares issued by qualifying unquoted trading companies.
There are both income and capital gains tax advantages to investing in EIS companies. The investor can:
- Benefit from income tax relief at 30% of the amount invested (subject to a permitted maximum investment of £1m).
- Capital gains made on the sale of shares are exempt.
- The investment can be used to defer capital gains tax on the sale of other assets.
There are very strict conditions which must be met to qualify for the above tax advantages.
As EIS is such a valuable relief it has in the past been open to abuse. With this in mind, at the Autumn 2017 budget HMRC introduced a new condition to the EIS (and also SEIS and VCT) rules to exclude tax-motivated investments, where the tax relief provides most of the return for an investor, with limited risk to the original investment (i.e. preserving an investor’s capital).
The condition depends on taking a ‘reasonable’ view as to whether an investment has been structured to provide a low risk return for investors. It has two parts:
- Whether the company has objectives to grow and develop over the long-term (which broadly mirrors an existing test with the schemes); and
- Whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return. The condition requires all relevant factors about the investment to be considered in the round.
How Hallidays can help
As the conditions for EIS are subjective and open to different interpretation, it is now even more crucial to seek expert advice to avoid HMRC challenging an investors reasoning for making the investment, costing valuable tax reliefs.
To learn more about how Hallidays can support you with EIS please contact our tax team on 0161 476 8276 or firstname.lastname@example.org. You may also like to read our success story about an EIS propelling a business into an exciting future.