Enterprise investment scheme income tax relief

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Enterprise investment scheme income tax relief
  • Introduction
  • Income tax relief
  • Dividends
  • Allowable capital losses and tax-free capital gains
  • Deferral of capital gains
  • Future changes

Introduction

The enterprise investment scheme (EIS) is the name of a scheme which encourages individuals to invest money in shares issued by qualifying unquoted companies with a permanent establishment in the UK.

A subscription for eligible shares of a qualifying EIS company is a tax-efficient investment for the individual as they 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 higher 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 income tax relief guidance note (subscription sensitive).

Note that a sunset clause for EIS income tax relief was introduced. This means 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)

The Government is planning to introduce a new EIS fund for knowledge-intensive companies from 6

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