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  • Stephen Kelly

THE ENTERPRISE INVESTMENT SCHEME (EIS)

This article provides an overview of the Enterprise Investment Scheme (EIS), the qualifying conditions and the benefits of EIS relief for the investor.

EIS gives tax incentives through Income Tax and Capital Gains Tax (CGT) relief to investors in smaller, unquoted, trading companies including:

  • Income Tax relief is provided at 30% on the cost of new EIS share investments.

  • No CGT charged on any gain of EIS shares disposed of after a minimum holding period.

  • CGT on the disposal of other certain assets can be deferred if capital proceeds are invested in EIS shares.

  • There is no minimum amount an investor can invest in any one company with a current maximum investment of up to £1 million (increased to £2 million provided at least £1 million is invested in Knowledge Intensive Companies (KICs).)

  • The maximum amount of investment that a qualifying company can receive in any given twelve months is limited to £5 million. (The limit is £10 million for KICs.)

QUALIFYING COMPANIES

To qualify for the EIS scheme companies must fulfil certain criteria. The issuing company must be:

  • A Qualifying trading company or the parent of a trading group: most trades qualify but ‘excluded activities’ include property development, farming, hotel and nursing home operation and many financial activities.

  • Unquoted at the time of the share issue. This means the company cannot be listed on the London Stock Exchange or any other recognised stock exchange. The Alternative Investment Market (AIM) is not treated as a recognised market.

  • A ‘small company’. Gross assets cannot exceed £15 million before the share issue, or £16 million immediately after.

  • A company that employs fewer than 250 full-time employees at the time of the share issue.

  • Carrying out the trade for which the money was raised for at least four months before an investor is eligible for EIS relief.

  • All money raised by the issue of relevant shares must be employed wholly for the purpose of the qualifying business activity within a time limit of two years.

TAX RELIEFS FOR THE INVESTOR

Income Tax relief

  • Individuals who subscribe for shares in an EIS qualifying company receive tax relief of 30% on the cost of the shares, this is offset against the individual’s Income Tax liability for the year in which the investment was made.

  • It is possible to ‘carry back’ all or part of the investment to the preceding tax year if certain criteria are met.

  • An individual is able to reduce their tax liability to zero through EIS relief, allowing the taxpayer to claim back any tax deducted at source or reduce the tax payable on other income, such as self employment, rental income or other investment income.

Qualifying conditions

Restriction for connected individuals

  • In the period commencing two years before the issue of EIS shares, and the later of three years after the investment was made and the date the company commences trading, an investor cannot be ‘connected’ with the EIS company.

  • Individual investors cannot be remunerated by the EIS company

  • The investor cannot directly or indirectly own or be entitled to acquire more than 30% or the company's or any subsidiary's:

  • Ordinary share capital.

  • Voting rights.

  • Rights to assets on a winding-up.

Three year holding period

The individual must retain the shares for a minimum of three years (or up to five if the trade commenced after the share issue date) otherwise any tax relief will be clawed back. Then can however be “gifted” to a spouse or civil partner and the tax relief status can be maintained.

Capital Gains Tax (CGT)

CGT Exemption

There will be no CGT charged on any gain of EIS shares disposed after the minimum holding period for Income Tax relief.

Capital Gains Tax (CGT) Deferral

  • CGT can be deferred if capital proceeds are invested in EIS shares, even if the investor is connected. The gain can be realised from most assets but the share investment must take place in the period of one year before or three years after the disposal of the asset. The minimum or maximum EIS investments do not apply to deferral relief.

  • Gains that qualify for Business Asset Disposal Relief (BADR) may be reinvested in EIS (or Social Investment Tax Relief) and will still remain eligible for BADR when the deferred gain is realised.

“Sideways” Loss relief

  • If EIS shares are disposed of at a loss (after any Income Tax relief has been taken into account) can be offset against income for that year and the previous year instead of being offset against capital gains.



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