Is EIS too good? Will the Chancellor reduce the benefits?

The EIS and Seed EIS are really good ways to invest money and save tax. Seed EIS is intended for smaller start ups while the EIS is intended for companies that want to expand but are too small for a public offering.

It’s always worth remembering that the tax benefits should be the icing on the cake, I would never advise someone to make an investments and potentially lose all their money just for a tax saving.

My opinion is that the Chancellor is likely to keep these schemes in place, I do not think they are considered to be ‘tax avoidance’. The only real fly in the ointment of the British economy is our low productivity growth. Investment is seen as the way to improve productivity, and the way to get investment to smaller companies is through these schemes.

Here is a bit more detail on how EIS works.

Income tax relief

Provided an EIS qualifying investment is held for no less than three years from the date of issue, or until three years from the commencement of trade, if later, an individual with no more than a 30% interest in the Company can reduce their income tax liability by an amount equal to 30% of the amount invested. The minimum subscription is £500 per company and the maximum in respect of which a subscriber may obtain income tax relief in any year is £1,000,000. Individuals may elect to treat their subscription for EIS shares, up to their maximum annual allowance, as if made in the previous tax year, thereby carrying back the income tax relief by one year. Thus the net cost to Qualifying Investors is 70 pence in the £1.

CGT exemption

No Capital Gains Tax is payable on the disposal of Qualifying Shares after three years, or three years after the commencement of trade, if later, provided the EIS initial income tax relief was given and not withdrawn on those shares.

Loss relief

If EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such loss can be set against the investor’s capital gains of his/her income in the year of disposal or the previous year. For gains offset against income tax, the net effect is to limit the investment exposure to 42p in the £1 for a 40% tax payer or up to 38.5p in the £1 for a 45% tax payer, if the shares become of nil value. Alternatively the losses can be offset against Capital Gains Tax at the prevailing rates of 10%, 18% or 28% for tax year 2013/14.

CGT deferral relief

Tax on gains realized on a different asset can be deferred, where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it. Deferral relief is unlimited, in other words, this relief is not limited to investments of £1,000,000 per annum and can also be claimed by investors (individuals or trustees) whose interest in the company exceeds 30%. This can be done on a sequential or serial basis.

Inheritance tax exemption

EIS investments are generally exempt from Inheritance Tax after two years of holding such an investment. EIS is appropriate for those investors who wish to include in their portfolio some high risk companies.