The Enterprise Investment Scheme (EIS) is designed to help small trading companies to raise finance by offering a range of tax reliefs to investors who subscribe for and purchase new shares in those companies.
Tax reliefs available
The main tax benefits for investors include:
- Income tax relief of up to 30% on the amount invested in qualifying investments of up to £1,000,000, giving a maximum tax deduction of £300,000 in any one year providing the individual has a sufficient income tax liability.
- If the investor holds the EIS shares for at least three years, any capital gain arising upon disposal will be exempt from capital gains tax.
- If the EIS shares are disposed of at a loss, the individual can elect for the amount of the loss (less any income tax relief given) to be set against total income or other capital gains.
- UK resident investors can defer gains on the disposal of any asset by reinvesting the gain into shares of an EIS qualifying company. There is no maximum amount of gain that can be deferred and the amount of gain to be deferred is not reduced by the amount of any income tax relief that is also claimed on the investment.
- For inheritance tax purposes, EIS investments qualify for 100% Business Property Relief once they have been held for two years.
Mr A has chargeable gains of £500,000 and income of £1 million in a tax year.
If Mr A subscribes for and purchases £500,000 worth of qualifying EIS shares:
- the chargeable gains of £500,000 will be deferred (until the sale of the EIS shares); and
- he will be entitled to claim income tax relief of £150,000 (£500,000 x 30%).
General requirements regarding issue of shares
- All shares must be subscribed for wholly in cash and fully paid up at the time they are issued. The shares must be non-redeemable ordinary shares, which do not carry preferential rights to the company's assets in the event of a winding up.
- A company is not allowed to raise more than £5 million in any 12 month period through the EIS, the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs).
- The money raised by the share issue can be used either for the purpose of an existing qualifying trade or for the purpose of preparing to carry on such a trade. Alternatively, the money raised can be used to carry on research and development intended to lead to a qualifying trade being carried on.
- The money raised by the share issue must be employed for the purposes of the trade or research and development within two years of the shares being issued (or within two years of the commencement of the trade, if later).
- There should be no pre-arranged exit for the investor.
- The shares must be issued for genuine commercial reasons, and not as part of a tax avoidance scheme or arrangement.
In order for investors to be able to claim, and maintain, the various EIS tax reliefs relating to their shares, the issuing company must meet the following conditions for the period beginning with the issue of the shares and generally ending three years after the date of the issue:
- The company must be an unquoted company at the time the shares are issued. For EIS purposes, shares listed on AIM are unquoted.
- The company must not be a 51% subsidiary of another company or be under the control of another company.
- The gross assets of the company (or group) must not exceed £15 million immediately before the share issue nor £16 million immediately afterwards.
- The company must have fewer than 250 full-time employees, or their equivalents, at the time the shares are issued.
- The company must exist wholly for the purposes of carrying on one or more qualifying trades, or be a parent company of a trading group.
- The trade must be carried on on a commercial basis and with a view to the realisation of profits and must not at any time consist wholly, or substantially, in the carrying on of "excluded activities".
- The company must have a permanent establishment in the UK, however, there is no requirement that the company be resident in the UK.
- The company must not be in financial difficulty.
Excluded activities include:
- dealing in land
- banking or financial services
- professional services
- property development
- receiving royalties or licence fees (unless substantially deriving from Intellectual Property created by the company or group)
- operating or managing hotels or nursing homes
Advance assurance scheme
HMRC operates an advance assurance scheme, whereby companies can submit their plans to raise money, together with details of their structure and trade, before issuing shares. HMRC will advise on whether or not the proposed share issue is likely to qualify.
It is important that professional advice is taken to maximise the chances of success, which Verfides can assist with.
The Enterprise Investment Scheme (EIS) is designed to help small trading companies raise finance by offering a range of tax reliefs to investors who subscribe for and purchase new shares in those companies.
Verfides has experience in obtaining the relevant assurance from HMRC so that shares issued by eligible companies will qualify for the Enterprise Investment Scheme.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.