The answer is simple, it is very important indeed.
Angels want to minimise risk as much as possible and the EIS Scheme provides them with a way to achieve this and an incentive to invest.
The EIS Scheme provides 5 ways of reducing risk:
30% Initial Income Tax Relief: If the qualifying investment is held for at least 3 years from date of issue, to a maximum of £500,000 per tax year. The relief is usually passed to the investor in the form of a tax rebate or by an adjustment in PAYE code. Actual cost of the investment is therefore only 70p in the £
No Capital Gains Tax is payable on disposal of the shares after 3 years as long as the initial EIS income tax relief was given and not withdrawn.
Inheritance Tax Relief In EIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax. Relief can be up to 100% after two years of holding the shares.
CGT Deferral Relief: This means that the tax realised on a different asset can be deferred indefinitely, if disposal of that asset was less than 3 years before the EIS investment or less than one year after it. This deferred relief is unlimited.
Loss Relief: If the shares are disposed of at any time at a loss, after taking into account the income tax relief, the loss can be set against the investor’s capital gains or his income in the year of disposal or the previous year. Losses offset against income, the net effect is to limit the investment exposure to 35p in the £ for a 50% tax payer, if the shares become totally worthless. Alternatively the losses can be offset against capital gains at the prevailing rate of 28%.
This all means that if an investor made an investment in an EIS qualifying company of £100,000, with the income tax relief of 30% this would reduce the net cash outlay to £70,000. If the shares then became worthless and the loss was then £70,000, the loss relief at 50% would equate to £35,000, so the net loss on a £100,000 investment, in these tragic circumstances, would be reduced to only £35,000, or 35p in the £.
The message is clear, if you are going to invest as an angel make certain that the company has obtained EIS approval.
Please note that I am not a qualified tax advisor so please always seek professional tax advice. The information above is only provided as basic information