One topic which is due to come up in the Advanced Tax September 2022 exam is the Enterprise Investment Scheme which offers tax benefits to venture capitalists that invest in unquoted trading companies.

Wealthy individuals can invest up to £1M /year in new shares in unquoted trading companies. The companies should have assets of no more than £15 million before the investment and in addition should not have more than 250 employees.

The business angel must be an unconnected investor (individual and family cannot own more than 30% OSC).

The amazing benefit available is a 30% income tax reducer so if a client makes the £1M investment, the client can deduct £300,000 from the income tax liability. Any unused income tax reducer can be carried back to the previous tax year to generate a tax refund.

In addition, EIS reinvestment relief enables the investor to postpone any gain as long as an amount equal to the gain is reinvested in EIS shares.

The qualifying period is 1 year before to 3 years after the disposal of the original asset. This gain will be postponed until the EIS shares are sold.

With EIS reinvestment relief, it is important to bear in mind that the original gain is simply deferred and will not become tax free.

As long as the EIS shares are retained for 3 years, any gain arising will also be tax free.

If a capital loss arises, it must be reduced by the income tax reducer claimed earlier.

From an inheritance tax perspective, these EIS shares will be eligible for 100% business property relief (BPR) as long as they are retained for at least 2 years.

Listen to the podcast below to help you understand this important topic.