Tax incentives such as the Enterprise Investment Scheme (EIS) are important when giving advice to wealthy clients prepared to invest in small unquoted companies. This features regularly in Advanced Tax and BPT.
EIS companies should have assets of less than £15M before the investment and no more than £16M after the investment. Additionally, the company should not have more than 250 employees.
The individual or business angel should be an unconnected investor which means that that the individual and family members should not own more than 30% OSC. The maximum investment cannot exceed £1M in a tax year.
There are lucrative tax benefits available to these business angels.
The first is a 30% income tax reducer so based on the maximum investment, you can reduce your income tax liability by £1M x 30% = £300,000. This income tax reducer can also be carried back to the previous tax year to yield a tax refund.
In addition, you can postpone paying CGT on another gain similar to rollover relief. This gain is postponed until the EIS shares are sold.
The EIS shares must be retained for at least 3 years to get these tax benefits. When the EIS shares are sold, the EIS gain is completely tax free.
This scheme is exceedingly popular with wealthy clients who have high tax liabilities as it provides an opportunity to immediately recover 30% of their investment through a tax reducer.
In addition, by supporting the business and helping it grow, the EIS shares can be sold to yield a tax-free gain. Tax is technical and I recommend you get a copy of Advanced Tax Condensed to help you. This uses accelerated learning techniques to quickly master the key information