Enterprise Investment Scheme 16th November 2012

Posted in: Capital Gains Tax, Personal Tax

Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) is a scheme designed to encourage individuals to invest in certain qualifying companies by giving tax relief on amounts invested.

When an individual subscribes for shares in a qualifying EIS company, he receives income tax by way of a tax reducer (a deduction from the individual’s tax liability) at 30% of the amount subscribed. The amount is capped at £1,000,000, giving a maximum tax reducer of £300,000.

The tax reducer is limited to the individual’s tax liability, so cannot create a repayment of tax.

Qualifying Company

To be a qualifying company, the investment must be made in:

  • a trading company
  • a company whose activities are not financial (e.g. dealing in shares, securities or commodities)
  • a company that is not providing legal or accountancy services
  • a company whose activities are not farming or market gardening
  • a company whose activities are not hotel management, property development, shipbuilding or coal and steel production.
  • a company that has a permanent establishment in the UK
  • an unquoted company
  • a company that financially is not failing
  • a company that is not a subsidiary or under the control of another company
  • a company whose assets do not exceed £7 million before the issue of the new shares and do not exceed £8 million after the issue of the new shares
  • a company with less than 50 full-time employees

Note that the company must be issuing new shares to the investor for the EIS relief to be given.

The comapny must then use the funds within 2 years on a qualifying business activity (trading purposes). Further, the company must have been trading for at least 4 months in order for the EIS relief to be eligible.

The shares subscribed for must meet certain conditions:

  • must be ordinary shares
  • must not have preferential rights to dividends
  • must be issued and subscribed for, for genuine commercial reason (i.e. not part of a tax avoidance scheme)

If the investor sells his/her shares within 3 years of the issues, tax relief is clawed back. The claw back amount depends on the disposal proceeds.

The Investor

In order to qualify for EIS relief, the investor must not be connected to the company in the 2 years before subscribing for the shares and up to 3 years after the issue.

The investor is connected if he or his associate is an employee of the company. Associate here means spouses or linear ascendants and descendants. Brothers and sisters are not included in the connected persons definition.

The investor is also connected to the company if s/he holds more than 30% of the ordinary share capital or can exercise more than 30% of the voting rights.

Seed Enterprise Investment Relief (SEIS)

This works in a similar way to EIS relief, except here the maximum amount subscribed for is much lower at £100,000, but the tax relief given is greater at 50%.

There are the same conditions over the shares issued as for EIS. The qualifying conditions for an SEIS company are:

  • the company cannot have more than £200,000 in assets immediately before the issue
  • the number of full-time employees must be less than 25
  • the funds raised must be spent within 3 years of the issue of shares
  • the qualifying activity of the company must be a new trade not more than 2 years old
  • the amount raised by the company through SEIS cannot exceed £150,000

From a capital gains tax perspective, EIS may be an attractive proposition. If you have a capital gain and reinvest the proceeds in an EIS company, the gain may be deferred. You don’t have to be unconnected to the company to get the capital gains deferral.

When EIS or SEIS shares are sold, any gain is exempt provided:

  • The disposal took place after the 3 year period; and
  • The investor received income tax relief on the investment

There are also certain beneficial loss relief claims that may be made, should the shares subsequently be disposed of at a loss.

More information on EIS can be found here.