ACCA Advanced Taxation (ATX) Practice Exam

What key benefit does EIS provide to investors, apart from tax relief?

1. Access to international markets

2. Shareholder voting rights

3. Ability to defer Capital Gains Tax

4. Guaranteed investment returns

The correct answer is: Ability to defer Capital Gains Tax

The Enterprise Investment Scheme (EIS) is designed to encourage investment in small, high-risk companies by offering various tax incentives to investors. One of the significant benefits of EIS, apart from tax relief, is the ability to defer Capital Gains Tax (CGT) on gains made from the disposal of other assets when the gains are reinvested into EIS-qualifying shares. When an investor realizes a capital gain and then invests that gain into EIS shares, they can defer the CGT liability until they sell their EIS shares. If they hold the EIS shares for a minimum period (which is typically three years), they will not only benefit from deferring the tax but may also be eligible for other tax reliefs such as loss relief if the investment does not perform well. This deferred tax advantage is particularly appealing, as it allows investors to reinvest their gains into potentially high-growth businesses without immediate tax implications, facilitating further investment and supporting the growth of new enterprises. The other options—access to international markets, shareholder voting rights, and guaranteed investment returns—do not align with the primary features of EIS. EIS investments are inherently high-risk and do not guarantee returns, and while investors may have shareholder rights, these are