1.2 The Tax Reliefs available

1.2.1 Income Tax Relief

This is available to individuals only, who subscribe for (although this can be through a nominee), shares in an EIS qualifying company. There has to be a minimum investment of £500 worth of shares in any one company in any one tax year. The relief is 20 per cent of the cost of the shares, to be set against the individual’s income tax liability for the tax year in which the investment was made. Relief can be claimed up to a maximum of £500,000 (subject to a Treasury Order confirming that to be made later this year) invested in such shares, giving a maximum tax reduction in any one year of £100,000 providing you have sufficient income tax liability to cover it. (Please note that this relief cannot be set off against dividend income, as the tax credit attached to the dividend is not recoverable.)

There is a 'carry back' facility where shares have been subscribed for in the first six months of a tax year (ie, 6 April to 5 October). The amount of relief due on the cost - subject to a maximum cost of £50,000 (and therefore maximum relief of £10,000) - of half of those shares can be carried back and set against the income tax liability for the previous tax year. Relief cannot be carried forward to a later year.

The shares must be held for a certain period or income tax relief will be withdrawn. Generally, this is three years from the date the shares were issued. But if the qualifying trade started after the shares were issued, the period is three years from the date the trade actually started.

Income tax relief can only be claimed by individuals who are not 'connected' with the company. (See 'Connection with the company' at 1.3)

1.2.2 Capital Gains Tax Exemption

If you have received income tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for the period referred to at 1.2.1 Income Tax Relief, any gain is free from Capital Gains Tax.

1.2.3 Loss Relief

If the shares are disposed of at a loss, you can elect that the amount of the loss, less any income tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.

1.2.4 Capital Gains Tax deferral relief

This is available to individuals and trustees of certain trusts. The payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period one year before or three years after the gain arose.

There are no minimum or maximum amounts for deferral. And it does not matter whether the investor is connected with the company or not. Unconnected investors may claim both income tax and capital gains deferral relief.

There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation.