For those running
or planning to launch a startup, every bit of assistance you muster up is one
more step towards the ultimate goal: success.
Of the many things
that make the United Kingdom such a great choice for potential startups and for
those looking to invest in them are the abundance of governmental assistance
programs available.
One of those
programs is the EIS Tax Relief scheme.
This article intends to explain in short what the EIS Tax Relief scheme is and how it helps British startups, especially regarding attracting investors.
What
Is the EIS Tax Relief Scheme?
Created by the
United Kingdom, the EIS scheme tax relief encourages
investors to fund early-stage businesses and startups.
EIS benefits
investors by offering them a potentially significant financial assistance in
the form of capital gains and income tax by investing in EIS eligible startups.
EIS helps
businesses by making them a much less risky investment opportunity and thus
more attractive to investors.
How
EIS Tax Relief Benefits Investors
There are several benefits for those interested in investing in EIS eligible startups. These benefits are also great selling points for EIS eligible startups looking to attract investors as well.
EIS
Capital Gains Tax Relief
- Deferral Relief: Investors will not have to
pay Capital Gains Taxes until a later date if the investor disposes of any
assets and uses the gain made on that asset to invest in a company qualifying
for EIS. The investor will only have to pay the Capital Gains Tax when they
dispose of their EIS company shares. - Disposal Relief: All gains accrued by an
investor who holds shares in an EIS company for three years or more may be
exempt from Capital Gains Taxes when they decide to sell them. For example, if
the investor buys £10,000 in shares, and those shares increase to £30,000, the
will not be taxed if the shares are three years or older. However, one should
take note that this is only an example. Startup equities are high-risk assets,
which means investment values could decrease over time.
EIS
Income Tax Relief
Investors have the
opportunity to claim up to 30 per cent of the value of their investment. This
decrease comes in the form of income tax relief.
Therefore, if one
were to invest £10,000, they can save £3,000 in income tax.
Carry-Back:
Applying Tax Relief to a Previous Year
As long as the EIS
shares purchased haven’t gone over £1,000,000 within that year, investors can
treat some or all of their shares as if they were issued the year before.
For example, if one
were to invest £10,000 in an EIS eligible startup within the 2019-2020 tax year, their income tax relief
would be £3,000.
Investors can apply
to have that £3,000 “carried back” to the previous 2018-2019 tax
year, as well as relieved against their taxes in 2019.
However, they
cannot have acquired more than £1,000,000 of shares within that year.
EIS Tax Relief Rules for
Investors
- Investors can only invest a
maximum of £1 million EIS qualifying startups within each tax year - Investors must hold the shares
they purchase for at least three years - If an investor sells or gifts
their shares within before the three-year period, those shares will be subject
to “relief clawback” - Investors cannot
“carry-forward” their EIS tax relief - The investor must be United
Kingdom taxpayers - Investors cannot be connected in
any way to the EIS company - Investors must purchase brand new
shares that have never been on the market.
