Question 1: As an IFA recommending tax efficient investments to my clients, can you just confirm how an investor can claim income tax relief for an investment in an EIS fund?

Julian's answer: When an investor makes an investment into an EIS fund, assuming he is a UK taxpayer, he will be entitled to income tax relief on his investment of 20%. This is available up to a maximum of £500,000 invested in a single year. However, after changes announced last year, the investor can carry back all or part of his investment into the previous year, effectively allowing him to invest a maximum of £1,000,000 across 2 years – and claiming income tax relief of 20% against a maximum of 500k in each year. It is worth remembering, though, that to achieve full income tax relief, the investments must be held for the qualifying 3 year period. For a client who earnt £150,000 in 2009/10, investing that figure into an EIS now would generate £30,000 of income tax relief. Interestingly, if his earnings rise to £600,000 next year, he can claim to his limit of £100,000 tax relief and, then carry back a further £20,000 against 2009/10.

Question 2: I have heard of approved and unapproved EIS funds, but I am confused about the difference. Can you explain what each does?

Julian's answer: Firstly an explanation of the terms - an approved fund is so called because the EIS fund manager has given certain undertakings to HMRC, and received in return approved status. The most significant of these is that the manager will invest at least 90% of the investors’ money into a minimum of 4 companies within 12 months of the fund’s close. An unapproved fund makes regular investments over a longer timeframe and delivers an EIS certificate for each investment made.

So what? An approved fund has two notable differences as a result of this, an investor can claim income tax relief on his whole investment at the date the fund closes – usually on or around 5 Apr; and the fund issues a single EIS tax certificate later in the year to the investor, which he can submit to the revenue with his tax return.  By contrast, in an unapproved fund, income tax relief is gained for each investment, but can only be claimed as and when each one is made.

If you have any questions relating to EIS investments please email them to nrobson@longbow.co.uk.