A Simple Guide To The EIS Scheme
Small trading companies that take on a lot of risk may be eligible for the Enterprise Investment Scheme (EIS).
This scheme allows companies to raise finance by offering numerous tax relief incentives to investors who purchase new shares. Firstly, let’s look at the tax reliefs available to investors.
Income Tax Relief
An investor is eligible for Income Tax relief if they’re offered full-risk ordinary shares in a company eligible for the EIS. Relief can be claimed for investments up to £1 million, resulting in a maximum annual tax reduction of £300,000. In some cases, ‘carry back’ facilities exist where the investor can elect to treat the shares as though they had been issued in the previous year.
All shares must be held for a period of three years from the issue date. The exception is where the trade has been qualified after the shares have been issued, in which case the three-year period starts with the commencement of the trade.
It’s important to remember that Income Tax relief is not eligible to those connected to the company by financial interest or employment. However, business angels who serve as directors with no remuneration are eligible and, in many cases, can remain eligible if they become paid directors.
Capital Gains Tax Exemption
This relief exists for investors who have received Income Tax relief, and wish to dispose of their shares.
Although investors won’t receive these capital gains exemptions if they never claimed Income Tax relief, there are situations where they may receive Entrepreneur’s relief.
Share Loss Relief
In some cases, it may be advisable for an investor to dispose of shares at a loss. This loss can be set against income earned, less any Income Tax relief claimed. This can often be a better option than seeking a capital gains tax exemption.
As Share Loss Relief has been designed to stimulate investment in unquoted companies, it’s available to both individuals and companies. However, only investment companies are eligible to make claims.
Capital Gains Tax Deferral Relief
For investors involved in certain trusts, capital gains tax can be deferred if that capital gain is used to purchase shares in a company eligible for the EIS.
In this circumstance, the investor can be connected with the company, while unconnected investors can claim capital gains tax deferral relief alongside Income Tax relief. While there is no minimum period for holding the shares, the capital gain must be invested either one year before or three years after it has arisen.
Now we’ve established the tax reliefs, let’s look briefly at the rules around companies issuing shares under the EIS.
Unquoted and Quoted Companies
At the time shares are issued, the company can’t be listed or be making arrangements to be listed on a recognised Stock Exchange. However, investors can still claim relief if the company commences arrangements to be listed at a later date.
The company can also qualify if listed on the Alternative Stock Market (AIM) or PLUS Markets, with the exception of PLUS-listed.
Subsidiaries
At the time shares are issued, the company can’t control another company unless that company is an EIS qualifying subsidiary. For the subsidiary to qualify, the share-issuing company must hold over 50% of the subsidiary’s ordinary share capital.
In the case of property management subsidiaries, the share-issuing company must hold 90%.
Holding and Controlling Companies
At the time shares are issued, the company can’t be controlled by another company or person connected with another company. However, an exception exists if the company deems it structurally necessary to create a holding company.
In this case, company shares will be exchanged for shares of the same kind in the holding company. Although normal rules would count this as a disposal of shares, the EIS will effectively treat this exchange as a continuation of the old shareholding, and the qualification periods and relief incentives will remain unchanged.
Assets
The Gross Assets of the company must be less than £15 million before the share issue. This figure rises to a maximum of £16 million, immediately after the share issue, as relief can only be claimed for investments up to £1 million.
Employees
The company must have fewer than 250 employees at the time shares are issued.
The EIS offers excellent incentives for investors wishing to seek tax relief new opportunities. As this is a brief overview, it’s strongly recommended you consult a Chartered Financial Planner for the best investment strategy.
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