What is an EIS?
The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
In their basic form, EIS shares must be fully paid up shares when they are issued. Furthermore, shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up. There must be no arrangements to protect the investor from the normal risks associated with investing in shares, and no arrangements at the time of investment for the shares to be sold at the end of the relevant period.
Investment through EIS funds
St. James's Place can advise its clients to invest through an EIS portfolio, which will invest on behalf of the investor in a number of qualifying companies. The investor is still the owner of the shares, and the process for claiming relief is as set out below. However, it does legitimately reduce some of the investment risk, through diversification.
The portfolios available via St. James's Place Partners are approved by HMRC. Investment through one of these funds, therefore, means the investor will benefit from the tax reliefs outlined.
It should be noted, however, that ‘approval’ by HMRC is relevant only to the tax treatment of the EIS investments. It does not guarantee the safety or success of the investment, and the investor is as likely to have relief reduced or withdrawn on the EIS as anyone who invests directly into the company that qualifies for such reliefs.
Tax reliefs available
Income Tax relief, Capital Gains Tax exemption and deferral, and Inheritance Tax exemptions are available to investors and are described below.
Business Relief (BR)
Business property Relief, now referred to as Business Relief, was introduced in 1984, originally to enable privately owned businesses to be transferred between generations without incurring Inheritance Tax (IHT).
To qualify for BR now an individual must invest directly in the shares of individual companies, but this will include EIS funds. Therefore, by investing in EIS shares, it is possible to benefit from BR, thereby, relieving the value of the shares from the investor’s estate after just two years which, providing they are still held on death, can provide significant IHT savings.
Minimum period of ownership
A minimum period of ownership applies to an investment in order to qualify for BR. In most cases, BR is only available when the investment has been owned for the two year period immediately preceding the transfer of the investment on death.
However, where the investment is gifted during lifetime (rather than upon death) but the donor dies within seven years of the gift, BR is only available if the investment retained BR qualifying status and is held for seven years by the recipient.
BR preservation rules
In circumstances where the BR-qualifying investment has been disposed of before death, the relief is not necessarily lost. It will be preserved as long as the proceeds are used to buy more BR qualifying investments and that occurs within three years of the date of the asset disposal.
There is a risk that these types of investments may not perform as hoped and in some circumstances, may fail completely, so should not be considered unless you are willing to accept a high level of risk. The levels and bases of taxation, and reliefs from taxation, can change at any time.