This is available to individuals only, who subscribe for (although this can be through a nominee), shares in an Enterprise Investment Scheme (EIS). Relief is at 30 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.
Before 6 April 2011 relief was at 20 per cent of the cost of the shares, and before 6 April 2012 there was a minimum investment of £500.
Relief can be claimed up to a maximum of £1,000,000 invested in such shares, giving a maximum tax reduction in any one year of £300,000 providing you have sufficient Income Tax liability to cover it.
There is a 'carry back' facility which allows the all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year. Relief is then given against the Income Tax liability of that preceding year rather than against the tax year in which those shares were acquired. This is subject to the overriding limit for relief for each year.
See VCM10530 for more information about how the relief works to reduce Income Tax liability.
The shares must be held for a certain period or Income Tax relief will be withdrawn.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 paragraph 1.3)
If you have received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for the period referred to at paragraph 1.2.1 Income Tax Relief above, any gain is free from Capital Gains Tax.
Note: if no claim to income tax relief is made, then any subsequent disposal of the shares will not qualify for exemption from capital gains. This is because of the difficulty in establishing perhaps many years after the investment, whether both the investor and the company met all of the qualifying conditions not only at time of investment but for a continuous period of several years after investment. Entrepreneur’s relief may be available in certain circumstances - see Capital Gains Tax reliefs on shares.
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.
See VCM70000 for more information about share loss 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.
The Budget on 22 June 2010 announced changes to the capital gains rules.
After that date it is no longer possible both to defer such gains under the EIS rules, and for them to qualify for Entrepreneur's Relief. If you think that you may be affected by this you should seek advice before proceeding with investment under EIS.
See VCM23000 for more information about capital gains deferral relief.