Purpose of the Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) is designed to help smaller trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
Income Tax Relief for Investors
This is available to individuals only, who subscribe for (although this can be through a nominee), shares in an EIS. Relief is at 30% of the cost of the shares, to be set against the individual’s Income Tax liability for the tax year in which the investment was made.
Current maximum value of the Income Tax Relief for Investors
Relief can be claimed up to a maximum of £1,000,000 invested in such shares, giving a maximum tax reduction, in any one year of £300,000 provided the Investor has sufficient Income Tax liability to cover it.
Possibility to carry back part or the whole relief against Tax Liability for the preceding year
There is a ‘CARRY BACK’ facility which allows the all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year. Relief is then given against the Income Tax liability of that preceding year rather than against the tax year in which those shares were acquired. This is subject to the overriding limit for relief for each year.
If the shares are disposed of at a loss, that the amount of the loss, less any Income Tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.
After 3 years, subsequent shares disposal is free from Capital Gains Tax
After the Income Tax relief claim has been made (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for 3 years, any gain is free from Capital Gains Tax.
In case of investing gain from any asset disposal in EIS, the payment of tax on a capital gain can be deferred
In case of individuals and trustees of certain trusts, the payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period 1 year before or 3 years after the gain arose.
- To qualify, for the period of 2 years before the issue of the shares and ending,strong> 3 years after the issue (or 3 years after the commencement of the trade if that followed the share issue) the investors cannot:
- Control the shares issuing company, or hold more than 30% of the share capital or voting rights or be entitled to more than 30% of the assets in the event of a winding up (in looking at entitlement to assets, loans to the company are taken into account);
- Be a Partner, director (Except for where the only connection with the company is as a director who receives no remuneration (and is not entitled to such remuneration), and you had not previously been involved in carrying on the trade the company is carrying on at the time it issues the relevant shares), or an employee of the company.
- Shares need to be issued to investors after the company has received payment for them;
- The shares must be held for 3 years from the date the shares were issued (but if the qualifying trade started after the shares were issued, the period is 3 years from the date the trade actually started);
Limit on money raised
Within any 12 months period the investments must fall within GBP 5 Million limit.
How money raised by the share issue need to be employed for trade or R&D activities
The money raised by the share issue can be used either for the purpose of an existing qualifying trade or for the purpose of preparing to carry on such a trade.
Alternatively, it can be used to carry on research and development intended to lead to such a qualifying trade being carried on.
The money raised by the share issue must also be employed for the purposes of the trade or research and development within 2 years of the shares being issued (or within 2 years of the trade commencing, if that is later).
If the money is used to acquire shares in a company which after the investment is a 90% qualifying subsidiary, and that subsidiary uses the amount of money within the appropriate timescale for the purposes of its qualifying activity, then that will be regarded as ‘employment’ of the raised sum.