What is the tax treatment of Enterprise Investment Scheme (EIS) investments?

The Enterprise Investment Scheme (EIS) is a UK government initiative designed to encourage investment in unlisted, higher-risk trading companies by offering substantial Income Tax and Capital Gains Tax reliefs to investors.

### 1. Income Tax Relief

Investors can claim Income Tax relief on investments up to USD 1 million per tax year (or USD 2 million if the amount over USD 1 million is invested in knowledge-intensive companies).

• Relief Rate: The relief is typically 30% of the amount invested, deducted directly from the investor’s Income Tax liability.

Example: An investor pays USD 10,000 into an EIS-qualifying company. They receive 30% relief, reducing their tax bill by USD 3,000.

### 2. Capital Gains Tax (CGT) Deferral

If an investor sells an existing chargeable asset (like shares or property) and reinvests the gain into an EIS-qualifying company, they can defer the CGT liability on the original gain. The deferred tax becomes payable only when the EIS investment is sold or withdrawn, or the company ceases to qualify.

### 3. Capital Gains Tax (CGT) Exemption on Disposal

If the EIS shares are held for at least three years and all qualifying conditions are met, any capital gain realised upon the sale of those shares is exempt from CGT.

### 4. Loss Relief

If the investment results in a loss (i.e., the shares become worthless), the investor can offset this loss against their income (either current year income or a prior year's income) at their marginal rate of income tax, providing a significant downside protection.

### Conditions and Clawback

For the reliefs to remain valid, the investor must not be an employee (unless a director) and must not own more than 30% of the company's share capital or voting rights. If the shares are sold within three years, or if the company fails to meet its qualifying trade status, the Income Tax relief is 'clawed back' by HMRC.