EIS Funds are managed portfolios of individual Enterprise Investment Scheme (EIS) qualifying investments, run by a fund manager. Subject to personal circumstances, each individual investment conveys EIS tax relief. There are two distinct types of EIS Fund; HMRC ‘Approved’ and HMRC ‘Unapproved’.
Given the increased flexibility from a tax planning point of view, in particular the ability to ‘carryback’ income tax relief to the previous tax year, Unapproved EIS Funds are the more common type.
This terminology used to distinguish the two is unhelpful and relates to whether the Fund, as an entity, has received prior approval from HMRC on the Fund’s structure. It does not afford investors as much protection as the word ‘Approved’ might imply and doesn’t convey a judgement from HMRC on either the quality of the investments or whether they are more likely to receive HMRC’s blessing for EIS qualification.
There are important tax planning differences and administrative differences between the two, with the most significant tax planning difference being that the income tax relief received relates to the tax year in which an Approved Fund closes and that it is not possible to ‘carryback’ income tax relief to the previous tax year. It is also worth being aware that an Approved Fund issues a single EIS5 certificate to investors, as opposed to EIS3 certificates for each individual EIS investment.
Both Fund types seek to provide investors with a diversified portfolio of EIS qualifying companies. EIS is a government sponsored scheme designed to encourage investment in smaller companies through generous tax breaks for private individuals. EIS qualifying investments can convey 30% income tax relief, tax-free capital gains, capital gains deferral, business relief (inheritance tax free) and loss relief. Whilst an EIS qualifying investment must by its nature be an investment in a small and usually unquoted company. Investors often access these companies through a Fund, managed by a fund manager, which then invests on the investor’s behalf.
To qualify under the EIS rules a business must meet various criteria, more information from HMRC can be found on the Gov.uk website.
Investors must also meet certain criteria; the maximum investment is £1 million per year, so the maximum income tax relief one can claim is £300,000 in any single year providing, there is sufficient income-tax liability to cover the investment. With the exception of investments made through an HMRC Approved EIS Fund, there is the ability to ‘carry-back’ for income tax relief purposes and treat the investment as if it had been made in the previous tax year. This allows a refund from HMRC on tax paid the year before. The investment must also be held for a minimum of three years from the date of issue of shares, otherwise there may be a clawback of tax relief.
See how EIS Funds compare with their smaller sibling and find out more about SEIS Funds here.
To view our currently available EIS Fund offers, visit the Open Offers section of our website.
Please note Kin is unable to give taxation or financial advice and strongly recommends private investors speak with a suitably qualified independent financial adviser. Your capital is at risk and EIS Funds are high risk investments. They will not be suitable for all investors. Tax benefits received depend on individual circumstances and may be withdrawn at a later date.
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