The Enterprise Investment Scheme (EIS) is a series of tax

Tax

To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 reliefs designed to encourage investments in small unquoted companies carrying on a qualifying trade in the United Kingdom

United Kingdom

The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

.

Purpose

Investment in companies that are not listed on a stock exchange

Stock exchange

A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...

 often carries a high risk. The tax relief is intended to offer some compensation for that risk. The EIS offers both income tax and capital gains tax reliefs to investors who subscribe for shares in qualifying companies.

Provisions

• An individual with no more than a 30% interest in the company can reduce his income tax
  Income tax
  An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
  
   liability by an amount equal to 30% of his share subscription. The minimum subscription is £500 per company and the maximum per investor is £1,000,000 per annum.FT_Budget2011
• Deferral of gains realised on a different asset, where disposal of that asset was less than 12 months before the EIS investment or less than 36 months after it. (Deferral relief). This relief is not limited to investments of £400,000 per annum and can be claimed by investors whose interest in the company exceeds 30%. It is available to individuals and trustees. Where gains arise on the EIS investment, taper relief is available. Note that deferral of gains is no longer available by investing in VCTs.
• No Capital Gains Tax
  Capital gains tax
  A capital gains tax is a tax charged on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals and property...
  
   payable on disposal of shares after three years (after five years for investments made before 6 April 2000) provided the EIS initial income tax relief was given and not withdrawn on those shares.
• If EIS shares are disposed of at any time at a loss, such loss can be set against the investor's capital gain
  Capital gain
  A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor...
  
  s or his income in the year of disposal.

EIS Investments are exempt from Inheritance tax

Inheritance tax

An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...

after two years of holding such investment.
(Source: Enterprise Investment Scheme Association)

Qualifying Companies and Individuals

The rules for qualifying are complicated; see HMRC.

However, in brief some of the following qualifications must be met:

The Company

• The Company must not have assets greater than £7million
• All capital employed must be actively engaged in the company within 24 months
• The Company must not be in specific industries
• Entry into the scheme is subject to a decision and audit made by an appointed tax officer
• The company must not be listed or have any intention of becoming listed at the time of the investment

The Individual

• The investor may not have more than a 30% interest in the company
• No Partner or Associate of the investor (including spouse, relations, prior business contacts) may have other interests in the company
• The investor must not have any form of preferential shares
• The investor must not have any other form of controlling interest in the company
• This scheme must not be used for the purposes of evading tax

External links

• Enterprise Investment Scheme Association
• Venture Capital Schemes Manual