Enterprise Investment Schemes (EIS)
The Enterprise Investment Scheme (EIS) was a replacement for the Business Expansion Scheme (BES), taking effect from 1st January 1994. It was intended to help types of small, higher-risk, unquoted trading companies to raise capital by providing a range of tax reliefs for investors.
Income tax relief at 30% is given for qualifying investments issued on or after 6th April 2011. Previously relief was given at 20%. The maximum annual investment under EIS increased to £1,000,000 from April 2012. The relief is given as a reduction to the investor’s tax liability.
Income tax relief is given in the year of assessment in which the shares are issued, rather than when the investment is actually made. The claim for income tax relief cannot be made until the company has carried out a qualifying trade for four months.
Relief is withdrawn if the shares are disposed of within three years, except to a spouse and not on the death of the investor.
An investor may carry back income tax relief to the previous tax year by claiming that the qualifying shares are treated as having been issued in the previous year and, as long as the annual limit for the purposes of calculating income tax relief in any particular year is not exceeded.
A capital gain can be deferred by reinvesting the gain into an EIS company. Where only this relief is claimed (CGT deferral relief), there is no upper limit:
- Reinvestment must take place in the period beginning one year before and ending three years after the disposal giving rise to the gain
- The deferred gain is brought into charge when the EIS shares are disposed of unless a further qualifying investment is made
- The CGT rate applied to the deferred gain will be the rate at the time the deferral ends and the gain becomes liable to tax
- Gains arising on the disposal of EIS investments that qualified for income tax relief are exempt from CGT as long as the shares have been held for three years.
- Losses on EIS investments are allowable where either income tax relief or CGT deferral relief has been obtained, although a deduction is made for the initial income tax relief that has been given. A loss can be set against either chargeable gains or income.
If the shares are held for at least two years they qualify for 100% business property relief as unquoted companies and so attract 100% relief from inheritance tax.
Tax relief is given to qualifying individuals i.e. someone not connected with the company when subscribing – though they can subsequently become a paid director of the company.
Non-UK residents are eligible but can only claim relief against liability to UK income tax. No income tax relief is given if more than 30% of the capital is acquired, although CGT deferral relief would still be available.
A qualifying company must be unlisted when the shares are issued and there must be no arrangements at that time for it to become listed. Also, a company raising money under an EIS must have fewer than 250 full-time employees at the date on which the shares were issued.
The gross assets of the company must not exceed £15m immediately before the issue of the shares nor £16m immediately afterwards.
To qualify for relief the company must not have raised more than £5m under all venture capital schemes in the twelve months ending on the date of investment – if the limit is exceeded, none of the shares will qualify for relief under the EIS.
There must not be any pre-designed exit conditions to mitigate investment risk. Investing in unlisted trading companies is very high risk and there is a strong possibility of the companies failing. An EIS must be held for 3 years to retain the income tax and CGT relief, even after that period it may be difficult to dispose of the shares, as the market is likely to be very illiquid or even non-existent.
Seed Enterprise Investment Schemes (SEIS)
The Seed Enterprise Investment Scheme (SEIS) was introduced in 2012 and its aim is to stimulate entrepreneurship and kick start the economy. The criteria of a SEIS varies from that above as they are focused on smaller, brand new companies which are higher risk and therefore the scheme offers higher tax relief as an incentive. As the companies receiving investments from a SEIS are less advanced than those that are EIS eligible, the restrictions are enhanced.
The core requirements surrounding a SEIS are as follows;
SEIS investors can place a maximum of £100,000 in a single tax year, which can be spread over a number of companies.
A company can raise no more than £150,000 in total via SEIS investment.
Investors cannot control the company receiving their capital, and must not hold more than a 30% stake in the company in which they invest.
Investors can receive up to 50% tax relief in the tax year the investment is made, regardless of their marginal rate.
The company seeking investment must be based in the UK, and have a permanent establishment in the British Isles.
The company must have fewer than 25 employees. If the company is the parent company of a group, that figure applies to the whole group.
The company must be no more than two years old.
The company must have assets of less than £200,000.
The company has to trade in an approved sector such as medical research, technology or charity – generally not in finance or investment, for example, a property company can't raise capital through SEIS.
If you hold shares in a SEIS for more than 3 years, no Capital Gains tax would be payable. You would also reap the benefits of no inheritance tax after only 2 years of holding the shares, due to Business Property relief. Any loss on the value of shares within a SEIS can be offset against your income tax bill so there are plenty of different benefits to draw you in.
If you have an interest in investing in an EIS or SEIS, you’ll need to fully understand the risks involved, legibility and the benefits that would then be available to you. Our experienced, independent financial advisers are always on hand to discuss these options with you and whether they’re appropriate to your circumstances. Investing in smaller companies can provide high returns and gratification in boosting the economy but the risk involved should not be ignored.
Venture Capital Trusts
The Venture Capital Trust scheme was set up to encourage individuals to invest in certain types of small, higher risk trading companies not listed on the official list of any stock exchange.
A VCT must predominantly hold the shares and securities of unlisted companies. By investing in VCTs investors are able to spread the investment risk over a number of companies. Investments can be made by subscribing for new shares when a trust is launched, or by purchasing shares from other investors after the trust is established.
The rate of income tax relief for investments in qualifying VCT shares was increased from 20% to 40% for shares issued in the 2004/05 and 2005/06 tax years then reduced to 30% for shares issued on or after 6th April 2006. The annual investment limit for shares issued on or after 6th April 2004 is £200,000.
Relief is withdrawn if the shares are disposed of within 5 years except to a spouse and not on the death of the investor. Dividends received from VCT investments of up to £200,000 per tax year are exempt from any additional income tax although the tax credit cannot be reclaimed.
Capital gains tax deferral relief is no longer available for gains reinvested in VCT shares issued on or after 6th April 2004.
Gains arising on the disposal of VCT shares that were acquired by subscription or purchase are exempt from CGT and there is no minimum period for which the shares must be held. Any losses on VCT shares are not allowable losses for CGT purposes. Neither are they available to offset against other capital gains.
VCTs have to be approved by HMRC and must be listed on the Stock Exchange. Additionally, all of the money raised by a VCT must be employed within two years, and the income must be mainly derived from shares or securities and it must not retain more than 15% of the income.
At least 70% of the VCT investments must be in “qualifying holdings” which are newly issued shares in qualifying unlisted trading companies. Not more than 15% of its total investment must be invested in any single company or group.
A company raising money under a VCT must have fewer than 250 full time employees at the date on which the shares are issued.
To be a qualifying holding of a VCT, a company must have raised no more than £5m under all venture capital schemes in the twelve months ending on the date of the investment – if exceeded, none of the shares will rank as a qualifying holding for a VCT.
The VCT itself is exempt from corporation tax on gains arising on the disposal of its investments, and theses realised gains can be distributed to investors as dividends, with no additional tax liability for the investor.
A VCT has a five year holding period for the retention of income tax relief, although it may be difficult for an investor to sell their shares after that time, even though the shares are listed. Demand for existing shares will be weak as the tax relief is only available on subscriptions of new shares, not on those bought in the market.
A VCT should be a lower risk investment than an EIS. A VCT is a pooled investment, although the underlying investments are relatively high risk, while an EIS is an investment in a single company.