Enterprising Changes to EIS?
In the past few years the availability of tax shelters to individuals has steadily eroded. For instance, restrictions on loss reliefs have meant that most partnership structures seeking to give tax reductions because of initial losses are now of limited value.
Similarly, pension reliefs have been materially constrained by recent reforms. Against this background, it was a surprise when the March Budget increased the attractiveness of the Enterprise Investment Scheme (EIS).
EIS offers a package of tax reliefs where an individual subscribes for new shares as a minority holding in an unquoted company. Not all trades qualify under EIS; notable exclusions are for property development, farming and hotels.
The key income tax relief under EIS was increased to 30% under the Budget proposals. This compares with a 20% upfront tax relief which applied up to 5 April 2011. The other capital gains tax advantages have been retained. There is a capital gains tax exemption on a sale after the three year qualifying period. Capital gains tax on other gains can be sheltered where EIS investments are made.
The income tax relief is capped at the generous level of £500,000 although there is no upper limit on the amount for capital gains tax deferral. In the second helpful change, the size criteria for companies qualifying for EIS is to be significantly widened from 6 April 2012. The maximum number of employees will rise from 50 to 250; the maximum gross assets will rise from £7M to £15M. These changes will significantly add to the number of investment opportunities where EIS can be claimed.
Further, the maximum upfront income tax relief is to be doubled to £1M. A range of conditions must be met to qualify for these generous tax reliefs. Care must be taken to ensure investments are made in qualifying companies and held for minimum qualifying periods to maximise the reliefs on offer. EIS investments are inevitably a higher risk. Where a venture does fail, a further income tax relief can be claimed on the cost of the investment less the upfront income tax relief. For a 50% taxpayer, this further tax relief can amount to 35% of the investment. This gives a total of 65% tax relief against the cost of failed investments.
Further, the EIS rules offer a capital gains tax free upside on successful investments. Most EIS investments attract business property relief after two years and can therefore pass IHT free. A combination of the new rules and no CGT liability on disposal, the ability to defer accrued CGT liability and potential to reduce inheritance tax makes interesting headlines, but the devil is in the detail and before pursuing an investment of this type, thorough research should be undertaken.
For more information about EIS, please speak with your usual C+T adviser or contact Gordon Birrell on 0131 558 5800 or email gordon.birrell@ctfslimited.co.uk