As with any investment, it is important that anyone participating in a share issue is aware of the risks involved. This is especially the case when looking at an EIS investment as there can be a significant risk to any capital invested. Investors should be very careful not to invest any money that they are unprepared to lose.
These investments are in small companies where the risk of the company failing can be high. The investments are also very illiquid and need to be held for at least three years before a share sale can be completed. Many EIS offers include an exit strategy but of course, there are no guarantees.
Of course, the tax breaks offered to EIS investors are significant and this reflects the real risk to capital over the course of an EIS investment.
For investors the main tax breaks of using the scheme are as follows:
- Income Tax relief worth 50% of the amount invested to qualifying individual investors on a maximum annual investment of £100,000.
- A 50% exemption from Capital Gains Tax on gains reinvested within the scope of the SEIS.
- Disposals of SEIS shares are exempt from Capital Gains Tax once they have been held for three years and certain qualifying conditions are met.
Investors in EIS schemes need to appreciate the risks involved. However, the possibility of high returns has made the EIS a very popular scheme, especially for wealthy and savvy taxpayers. It is important to note that the tax reliefs are only available where there is sufficient liability against which to set it.
There are carry-back provisions that allow taxpayers to treat some or all of the cost of the shares to be carried back to the previous tax year. Under certain circumstances, small business owners can also benefit from the EIS rules to invest in their own businesses.
If a company no longer qualifies for EIS tax relief then investors will have to repay any tax relief they have received. There is also the risk that the EIS rules will change in the future, especially as Brexit continues to roll on but they should not be retrospective.
One way that some investors use to reduce their capital risk is to spread their investments using a professionally managed EIS fund.