What are the benefits of EIS?
The Enterprise Investment Scheme (EIS) is a well-established UK government scheme that offers generous tax reliefs to those investing in young, higher risk qualifying companies. It is one of four venture capital schemes established by the UK government to help small or medium-sized companies and social enterprises.
The scheme helps to provide companies with the funds required for growth and can fast-track the trajectory of promising businesses.
The Enterprise Investment Scheme (EIS): Who qualifies?
A company (or group of companies if it’s a parent company) may be able to qualify for standard EIS if at the time of investment if it has no more than £15 million in gross assets, less than 250 employees, and it has been fewer than 7 years since its first commercial sale.
If a company raises money by a new share issue with EIS, it must be used for qualifying business activity and the company must adhere to financing constraints.
Why invest in EIS?
There are many EIS benefits for investors. Apart from being able to invest in the newest and most exciting companies, you can benefit from tax relief as a generous government incentive.
As an investor, it is possible to claim EIS relief on up to £1 million worth of investments in qualifying businesses per year. This can go up to £2 million worth of investments if you’re investing in knowledge-intensive companies.
EIS tax relief for investors
Investors can benefit from several tax reliefs including:
- Income Tax relief – applying to 30% of your investment, to be used in the year of investment or carried back one year.
As mentioned above, you can claim this relief on investments up to a cap of £1 million, or £2 million if at least £1 million is invested in knowledge-intensive companies.
- Capital Gains Tax exemption – on profits earned on shares that have been held for a minimum of three years, as long as you have claimed at least some Income Tax relief on them.
It’s possible to accrue your Capital Gains Tax exemption for longer than three years so long as you continue to hold the shares.
- Loss relief – if the business that you’ve invested in fails, you can offset your loss against either their Capital Gains Tax bill or Income Tax bill.
This can either be claimed the same tax year that you realise the loss or the following tax year.
The value of an investment must have fallen below the ‘effective cost’ when it is sold in order for it to qualify for loss relief. The effective cost is the amount invested minus whatever you previously claimed in Income Tax relief.
If the value of the investment drops to a negligible amount, investors can also make a ‘negligible value’ claim, even when the shares are still owned.
Loss relief against Income Tax and Capital Gains tax
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Investors in EIS may be able to offset losses against their Income Tax bill for the current or previous tax year under ITA 2007, Section 131, or against their Capital Gains Tax bill for the current or future tax years.
As Income tax rates are usually higher than Capital Gains Tax rates, the majority of investors choose to set any loss made against their income and claim relief at up to 45%.
- Inheritance Tax exemption
There is an Inheritance Tax exemption on shares that are held for a minimum of three years.
- Capital Gains Tax (CGT) deferral relief
Investors can access a Capital Gains Tax deferral on gains realised on the disposal of any asset which is reinvested in an EIS eligible company.
If you have capital gains greater than the annual exemption, these can be deferred by making an EIS investment.
If you access Capital Gains Tax deferral relief the gain is frozen and the tax liability is deferred until the EIS shares are disposed of. A further EIS investment can be made to defer the tax liability again.
Gains arising up to three years before and one year after the EIS shares are issued can be deferred, with no limit on the amount that can be invested.
What are the risks?
EIS investment carries its own risks.
A company must meet a ‘risk to capital’ condition which states that the investment must be a risk to the investor’s capital. Specifically, the investment should carry a risk that the investor will lose more capital than they are likely to gain as a net return.
This net return includes income from dividends, interest payments and other fees, capital growth, and upfront tax relief.
It is inherently more risky to invest in small companies over large ones. Because they have a greater propensity to run into difficulty and fail, investments can be hard to sell. The government understands this, which is why EIS gives investors tax relief as an added benefit and incentive to invest.
This is certainly not a false incentive, as EIS tax relief is set up to majorly soften the blow of any losses for the unlucky investor and create a worst-case scenario that has a small maximum effective loss. Still, a return on investment is never guaranteed, which should always be remembered.
Who might choose EIS?
An investor might choose EIS if they have a large amount of money to invest for the long term, needing neither access nor income from the account that they invest.
Investors may have a large income tax bill or a capital gain from selling a business, property, or shares, and wish to defer paying tax on this gain.
Whatever their unique situation, they must be in a financial position where they can accept that they may lose all or part of their investment.
EIS and Films4U film investment
At Films4U we’re proud to say that our distribution partner hasn’t lost money on a film yet, meaning we have been able to provide our investors with consistent returns.
We have a thorough assessment process to select our films for investment, however, in the unlikely event that a film fails to make a return EIS loss relief will be able to protect our investors.
To talk to one of our account managers about EIS and investment in the film industry, contact us.
The information contained on this website should not be taken as financial advice or as a personal recommendation by Films4U. Before investing you should always seek appropriate legal and financial advice from an authorised person specialising in investments of this kind.