EIS is a UK government initiative to encourage investment in small and growing businesses. EIS provides tax incentives to individuals who invest in qualifying companies.
Income tax relief
Under EIS, investors can receive income tax relief of up to 30% on investments of up to £1 million per tax year. If the investor sells the shares before the three-year period is up, they may lose the income tax relief. Losses on sale of EIS shares can also be offset against income tax liability. Investors in EIS funds can choose to treat an investment as if it was made in the previous tax year, which can be useful for tax planning. Investors have to hold shares have for at least three years and the company must remain EIS-qualifying for three years. If not, they’ll have to pay this tax relief back to HMRC. Income tax relief has to be set against the income tax bill for a tax year, but it can only reduce your income tax bill to nil, therefore it is important to ensure that you have paid enough income tax in the year of investment (or in the tax year of setting a claim).
Capital gains tax exemption
Additionally, investors are exempt from Capital gains tax on any profits made from the sale of their EIS shares. To qualify for income tax relief under EIS, the investor must hold the shares for a minimum of three years. If the investor sells the shares before the three-year period is up, they may lose the Capital Gain tax relief. Losses on sale of EIS shares can also be offset against income tax liability.
Capital gains deferral
A gain made on the sale of other assets can be reinvested in EIS shares and deferred over the life of the investment. There’s no upper limit on the value of gains that can be deferred. To qualify for deferral relief, the reinvestment into EIS-qualifying shares needs to be made no earlier than 12 months prior to, or three years after, the original gain was made.
The gain will be deferred until the earliest of any of the following events:
– The EIS shares are sold.
– The company ceases to be EIS-qualifying within three years of investment.
– An investor ceases to be a UK resident within three years of investment.
When the deferred gain comes back into charge, it’s subject to capital gains tax at the relevant rate at that time. A deferred gain that comes back into charge can be deferred again if it’s reinvested into a new EIS-qualifying investment. If the investor dies owning the EIS shares, the gain will be eliminated.
Inheritance tax relief through Business Property Relief
EIS shares qualify for Business Property Relief (BPR). This means they can be left to beneficiaries free from inheritance tax, as long as they’ve been held for at least two years at the time of death.
To qualify for EIS, a company must have less than £15 million in assets, fewer than 250 employees, and must not be listed on a recognized stock exchange. The company must also be engaged in a qualifying trade, which excludes certain industries such as finance and property development.
EIS can be a useful tool for investors looking to support small businesses and diversify their investment portfolios. However, it is important to carefully consider the risks associated with investing in small and growing companies before making any decisions.
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