EIS stands for Enterprise Investment Scheme. Investments in EIS shares are generally exempt from estate tax after holding the investment for two years. Investors will also not pay estate tax on shares they hold under any of these schemes for at least two years. A person who has not exercised rights to EIS shares in a financial year prior to the previous financial year may consider all or part of the value of the investment as a subscription for that year; up to the maximum annual investment limit for the corresponding year. 

How Doe It Work?

You may treat all or part of your EIS shares acquired during one financial year as if they were acquired in the previous financial year. If you have held EIS shares for at least three years, you have applied for income tax exemption and the company you invested in is still eligible. Capital gains tax is not payable on the sale of shares after three years, provided that the initial income tax relief under the Enterprise Investment Scheme has been granted and not withdrawn in respect of such shares. If existing shares of an EIS eligible company are purchased on the secondary market, none of the EIS tax benefits are available through the EIS.

Relief From Income Tax

Essentially, the EIS scheme is for investors to support EIS compliant businesses by offering them a potentially significant income tax (up to 30%) and capital gains relief (up to 50%) when they do so. The Corporate Investment Scheme helps riskier companies by offering their investors federal tax breaks that act as an incentive for investors to make the potential purchase of these companies’ shares more attractive. EIS shares must comply with the rules of the Corporate Investment Scheme in order for investors to claim and retain EIS tax benefits. EIS shares, also known as the Corporate Investment Scheme, were originally designed by the government to encourage investors to invest in smaller, unlisted companies.   

Benefits To Small Businesses

EIS is designed to help these small businesses raise capital by offering a range of tax benefits to investors who buy new small stocks. As with other similar types of investment vehicles, investors can take advantage of various tax benefits when investing in EIS. Investors will receive generous income tax, capital gains and estate tax deductions if they invest in an EIS-compliant business, so this presents many opportunities for growing startups to raise additional capital. Investors In addition to the tax credit, EIS also eliminates capital gains tax on these shares when individuals decide to sell them. 

The capital gains tax deferral exemption freezes capital gains and the tax burden is deferred until the shares are sold, although when this occurs additional investments in EIS may be made to defer the tax burden again. If you have a capital gain in excess of the annual exemption, it can be deferred by investing in the Enterprise Investment Scheme. 

In Case EIS Disposed Off

If EIS shares are disposed of at any time at a loss, that loss, net of previously granted income tax relief, may be set off against the investor’s income in the year of sale or the prior year. This exemption is limited to the amount invested in EIS and can be claimed by investors whose share in the company does not exceed 30%. Investor Loan The investor cannot claim damages if he has borrowed the money and the lender would not have offered the funds on the same terms in the absence of an equity investment, for example, if the investor takes out a loan to finance an investment and charges a share fee to the lender, the facility EIS will probably not be available.  

Conclusion

EIS investments have a “carry-forward” feature whereby some or all of the value of shares acquired in a financial year can be treated as if they had been acquired a year earlier, allowing investors to offset tax benefits with income tax. Knowledge-intensive approved EIS funds can facilitate tax planning for EIS investors by providing a fixed investment date for tax purposes and a single EIS5 certificate.