Matt Watts examines the implications of the recent EIS changes.
There have been a number of significant and favourable changes to the Enterprise Investment Scheme (EIS), which provides tax relief for individuals investing for equity in qualifying companies.
The new rules – announced in March's Budget – will substantially increase both the number of companies that can qualify for EIS investment, and also the amount individuals can invest through EIS.
In short, the Government sees EIS as playing a key role in ensuring that the UK economic recovery continues. By extending the relief to larger entities, EIS could now be an important, additional source of funding for AIM companies.
Extending the relief
The Government is extending EIS, both in terms of the criteria for investee companies that qualify, and also for those individuals investing. Unless specified otherwise, most of the announced changes will take effect for shares issued after 5 April 2012, subject to EU state aid approval. The main changes are summarized opposite.
Changes to EIS
Investee company criteria
- Number of full-time employees in the company (or group as appropriate) increased from 50 to 250
- Gross asset threshold for qualifying companies (or group as appropriate) increased to £15m immediately before the investment
- Relaxation of the requirement that qualifying companies must be carrying on their trade "wholly or mainly in the UK" – for shares issued after 5 April 2011; the company issuing the shares will be required to have a UK permanent establishment only
- Annual amount a qualifying company can raise in total under venture capital schemes (VCTs) (comprising both EIS and VCTs) increased from £2m to £10m.
Rules for investors
- Rate of EIS income tax relief for an individual increased from 20% to 30% (bringing relief in line with that available for VCTs) for shares issued after 5 April 2011
- Annual amount qualifying for income tax relief that an investor can invest under the EIS doubled from £500k to £1m.
What do these changes mean?
Clearly, the number of companies able to benefit from EIS will increase dramatically as a result of the announced changes. In particular, we anticipate that more AIM-listed companies will now also be able to qualify for EIS investment, representing an important additional source of capital for many.
For investors, the enhanced EIS tax reliefs, together with the doubling of the capital gains tax entrepreneurs' relief lifetime limit to £10m, should provide greater incentive to invest in private companies. The generous tax relief offered by EIS should ensure that individuals are generally willing to take greater risks on investing in small companies, while the extension of the size criteria for qualifying companies should also provide access to EIS for those investors wanting to back larger companies, often perceived to be lower risk. All in all, the changes are clearly seen by the Government as an important part of its policies aimed at stimulating enterprise and economic recovery.
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