EIS Tax Relief
A recent tax case has highlighted how easy it is to make a mistake with the Enterprise Investment Scheme (EIS). The scheme allows investors to obtain a 30% set off against their income tax liability up to £1,000,000 investment each tax year, as long as they are not connected to the Company. Also, if those shares are held for at least 3 years, the gain on disposal of those shares is tax free.
However, the investor must made a claim for income tax relief in order to receive the capital gains exemption. In the case, Ames v HMRC (2015), the taxpayer, invested £50,000 in a new company but did not claim EIS income tax relief due to his other tax circumstances. When he sold the shares several years later for £333,000, he found that the exemption did not apply and the gain was taxable.
The connected persons rule means that existing employees, paid directors and their associates are not entitled to these reliefs. Shareholders with more than 30% of the company’s shares, together with their associates, are also excluded.
Note that these exclusions do not apply where the investor is merely seeking to defer capital gains tax via their EIS investment.
The rules for EIS and Seed EIS (Seed EIS for small start-up companies provides 50% income tax relief and the same CGT exemption when the shares are sold) are very complex so please get in touch with us to discuss the tax implications if you are considering making such an investment.